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OPTIONS STRATEGIES·SHORT VOL·4 LEGS

Iron butterfly

Like an iron condor but with the short put and short call at the same strike (ATM). Higher credit, narrower profit zone — peaks if stock pins the short strike at expiry.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
LEGS
Long lower put
Type
Side
Strike
$
Qty
Premium
$
Short ATM put
Type
Side
Strike
$
Qty
Premium
$
Short ATM call
Type
Side
Strike
$
Qty
Premium
$
Long upper call
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $96.00BE $104.00spot $100.00
$60.003 strikes$140.00
P&L at current spot (expiry)
+$400
Net credit+$400
Max profit+$400
Max loss−$100
Breakevens$96.00 · $104.00
Risk / reward4.00 : 1
RISK PROFILE
Max profit
Net credit received
Max loss
Wing width × 100 − net credit
Breakeven
Short strike ± (credit ÷ 100)
HOW IT WORKS

How an iron butterfly works

An iron butterfly sells a call and a put at the same middle strike and buys a call and a put further out on each side. It is a short straddle with wings — the same bet that the stock finishes near the middle strike, but with a hard cap on what can go wrong.

Because both short options sit at the money, the credit collected is substantially larger than an iron condor's. The trade-off is that maximum profit occurs at a single point rather than across a range, so the position needs the stock to land close to the middle strike rather than merely somewhere between two levels.

Maximum loss is the wing width minus the credit. As with a condor, only one side can finish in the money, so the wings do not add together. Time decay works for you and rising implied volatility works against you.

WORKED EXAMPLE

Worked example: iron butterfly

XYZ trades at $100 and you expect it to stay pinned there. You sell the $100 call and the $100 put, and buy the $110 call and the $90 put, all expiring in 30 days. The four legs net a $4.00 per share credit.

Credit received
$4.00 × 100 = $400 (max profit, at exactly $100)
Max loss
($10 wing − $4.00) × 100 = $600
Breakevens
$96.00 and $104.00
At expiry, XYZ = $100
All legs expire worthless, keep $400
At expiry, XYZ ≤ $90 or ≥ $110
−$600, the maximum, and no worse beyond

Risking $600 to make $400 is a far better ratio than most credit structures — but only the exact $100 print pays in full. At $103, still inside the breakevens, the position makes about $100 rather than $400.

FIT

When an iron butterfly fits — and when it doesn't

Consider it when
  • You expect the stock to finish very close to a specific price.
  • Implied volatility is elevated and you expect it to contract, richening the at-the-money credit.
  • You want a short straddle's credit without its unlimited tail.
Think twice when
  • You expect a range rather than a point — an iron condor pays across a band instead of at a strike.
  • A catalyst inside the expiry could move the stock past a wing.
  • The wings are so wide that the maximum loss is larger than the position can justify.
FAQ

Common questions about an iron butterfly

What is the difference between an iron butterfly and an iron condor?

A butterfly sells both short options at the same strike; a condor separates them. The butterfly collects more credit but profits fully at a single point, while the condor collects less and profits across a range.

What is the maximum loss?

Wing width − net credit, times 100. Ten-point wings opened for a $4.00 credit risk $600 per contract. Only one side can be breached, so the wings are not additive.

Where are the breakevens?

Middle strike ± net credit. A $100 butterfly opened for $4.00 is profitable at expiry between $96.00 and $104.00.

Do I need the stock to land exactly on the strike?

To collect the full credit, yes. Anywhere inside the breakevens is still profitable, but the profit falls away steadily as the price moves from the middle strike in either direction.

RELATED STRATEGIES
Iron condor
Neutral · Defined-risk credit, profits when stock stays in range.
Call butterfly
Pin risk · Long 1 / Short 2 / Long 1 across three call strikes.
Short straddle
Short volatility · Profits if stock pins the strike.
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