Iron Butterfly options strategy

What is an iron butterfly?

An iron butterfly is a four-leg, defined-risk strategy. The trader sells an at-the-money call and put at the same strike, creating a short straddle, and buys an out-of-the-money put below and an out-of-the-money call above as protection. The position opens for a net credit. The long options, called wings, cap the loss on both sides, so the maximum risk is known before entry.

An iron butterfly profits most when the underlying finishes exactly at the center strike and can be thought of as a short straddle with insurance attached.

When to use it and the market view

Consider an iron butterfly when you expect the underlying to stay very close to its current price through expiration, often because of low expected volatility or a strong price magnet such as a heavily traded strike. It collects a larger credit than an iron condor with the same wing width because the short options are at the money, but its profit zone is narrower.

Because it is net short volatility, traders usually consider it when implied volatility is elevated and expected to settle. It is a more controlled way to express a short-straddle view: margin is limited to the wing width minus the credit, and a gap move cannot produce an open-ended loss.

Payoff, formulas, and a 200 strike example

Let K be the center strike, W the wing width, S the expiration price, and C the net credit.

Profit = C − |S − K| for prices within the wings, floored at C − W beyond them

Breakevens = K − C and K + C · Maximum profit = C · Maximum loss = W − C

Suppose you sell the 200 put and 200 call for $8 each, and buy the 190 put and 210 call for $5 each. The net credit is 16 − 10 = $6 per share ($600 per contract set), and the wings are $10 wide. At expiration:

• S = 200: all options expire worthless or at zero intrinsic value. Profit = +$6, the maximum.
• S = 203: the short call is worth 3. Profit = 6 − 3 = +$3.
• S = 194 or 206: profit = $0. These are the breakevens.
• S = 208: profit = 6 − 8 = −$2.
• S at or above 210, or at or below 190: profit = 6 − 10 = −$4 per share ($400), the maximum loss.

Maximum profit, loss, and breakeven

Measure	Formula	190/200/210, $6 credit
Maximum profit	Net credit	$6 per share ($600) at exactly 200
Maximum loss	Wing width − credit	$4 per share ($400) at or beyond 190 or 210
Breakevens at expiration	K ± credit	$194 and $206

Greeks and implied volatility impact

Delta starts near zero. Gamma is negative, especially near the center strike close to expiration, so the position's delta can shift quickly with small moves. Theta is positive: the at-the-money short options decay faster than the out-of-the-money wings, and that decay is the main source of profit.

Vega is negative. A fall in implied volatility helps the position before expiration, while a rise hurts, although the long wings reduce the effect compared with a naked short straddle. Much of the profit tends to arrive late in the option's life, which is also when gamma risk is highest.

Risks to manage

Maximum profit requires an exact finish at the center strike, which rarely happens. Most iron butterflies are closed early for a portion of the credit. The at-the-money short options carry meaningful early assignment risk, especially near ex-dividend dates. Four legs mean four bid-ask spreads and commissions, so liquid underlyings matter. Pin risk near the short strike at expiration can create an unexpected stock position after settlement.