Iron Butterfly
An Iron Butterfly sells an ATM call and put, and buys protective OTM wings — earning rich premium if price pins near the ATM strike.
At a glance
Strategy Snapshot
Market View
Neutral with conviction in a specific strike — expecting pinning.
Net Cost
Net credit (premium received).
Legs
Sell ATM Call + Sell ATM Put, Buy OTM Call + Buy OTM Put
Max Profit
Net credit received (at the ATM strike).
Max Loss
Wing width − Net credit received.
Breakeven
ATM strike ± Net credit received.
Build
Strategy Construction
Color-coded legs — emerald for long positions, rose for short positions. Strikes shown around reference spot 100.
- SELLLeg 1
1 × 100 CE
Premium 3.00
- SELLLeg 2
1 × 100 PE
Premium 3.00
- BUYLeg 3
1 × 110 CE
Premium 1.00
- BUYLeg 4
1 × 90 PE
Premium 1.00
Visualize
Payoff at Expiry
Conceptual payoff with reference spot = 100. Strikes and premiums shown are illustrative.
Sensitivity
Greeks Exposure
Net portfolio Greek exposure for a typical setup. Bars show directional sensitivity from −1 (short) to +1 (long).
Delta
Directional exposure to underlying price.
0.00
Neutral
Gamma
Sensitivity of Delta to price changes.
-0.80
Strong Short
Theta
Time decay exposure (per day).
+0.90
Strong Long
Vega
Sensitivity to implied volatility shifts.
-0.80
Strong Short
Strengths
Advantages
Why traders use it
- Higher premium income than Iron Condor.
- Defined max risk on both wings.
- Profits maximally near a specific pin point.
Trade-offs
Risks & Disadvantages
What can go wrong
- Narrow profit zone — small move can erase profit.
- Sensitive to vol expansion.
- Requires precise view on price pinning.
Avoid
Common Mistakes
Watch out for
- Choosing strikes far from current spot.
- Holding too long after price drifts away.
- Underestimating gamma risk near expiry.
AI Insight
LiveIron Butterflies generate the highest premium among defined-risk neutrals but require precise pinning. Best around max-pain strikes in low realized volatility with a known expiry anchor.
Generated by NextQuantLabs AI — for educational guidance only.
Questions
Frequently Asked
Why use a Butterfly over a Condor?+
Use a Butterfly when you have a strong view on a specific pinning strike. Use a Condor when you expect a wider range.
Is Iron Butterfly good for beginners?+
It's an intermediate strategy — requires understanding of gamma and assignment risk.