Iron Butterfly Strategy
Like iron condor but short strikes are ATM. Higher premium, narrower profit range.
What is a Iron Butterfly?
An Iron Butterfly sells an ATM straddle and buys OTM wings for protection. Four legs with three strikes. Higher premium than iron condor but narrower profit zone. Best when expecting very low movement around current price.
When to Use a Iron Butterfly
Use when you expect stock to stay exactly at current price. Best in high IV. Tight profit zone requires active management. Typical 30-45 DTE setup.
Key Formulas
- Max Profit
- Net credit × lot size (at ATM strike exactly)
- Max Loss
- (Wing width - Net credit) × lot size
- Breakeven
- ATM strike ± Net credit
Example Trades
AAPL IB at $200: Sell $200C and $200P, Buy $210C and $190P for $4 credit. Max profit $400. Max loss $600.
NIFTY IB at 22500: Sell 22500 Call and 22500 Put, Buy 22700 Call and 22300 Put for ₹250 net credit. Max profit ₹16,250 (× 65) at exact 22500 pin.
Common Mistakes to Avoid
- Expecting stock to hit exact strike (rare)
- Holding past 50% profit target
- Underestimating gamma risk near expiration
- Selling in low IV (not enough credit)
Related Strategies
Iron Butterfly FAQ
What is a Iron Butterfly?
An Iron Butterfly sells an ATM straddle and buys OTM wings for protection. Four legs with three strikes. Higher premium than iron condor but narrower profit zone. Best when expecting very low movement around current price.
When should I use a Iron Butterfly?
Use when you expect stock to stay exactly at current price. Best in high IV. Tight profit zone requires active management. Typical 30-45 DTE setup.
What is the maximum profit and loss for a Iron Butterfly?
Max profit: Net credit × lot size (at ATM strike exactly). Max loss: (Wing width - Net credit) × lot size.
What is the breakeven price for a Iron Butterfly?
Breakeven: ATM strike ± Net credit. US example: AAPL IB at $200: Sell $200C and $200P, Buy $210C and $190P for $4 credit. Max profit $400. Max loss $600. Indian-index example: NIFTY IB at 22500: Sell 22500 Call and 22500 Put, Buy 22700 Call and 22300 Put for ₹250 net credit. Max profit ₹16,250 (× 65) at exact 22500 pin.
What are common mistakes when trading a Iron Butterfly?
Common mistakes include: Expecting stock to hit exact strike (rare); Holding past 50% profit target; Underestimating gamma risk near expiration; Selling in low IV (not enough credit).
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