An iron butterfly is a neutral options strategy that profits when the stock stays at a specific price. It combines a short straddle with protective wings to limit risk. Here is how it works.
What is an Iron Butterfly?
An iron butterfly involves selling an at-the-money straddle (selling both a call and put at the same strike) and buying protective options further out. You collect a credit upfront and profit if the stock stays near the center strike.
Simple version: An iron butterfly is like an iron condor but with the short strikes at the same price. You want the stock to stay exactly where it is.
How to Set Up an Iron Butterfly
An iron butterfly has four legs:
- Buy 1 OTM put (lower strike - protection)
- Sell 1 ATM put (middle strike)
- Sell 1 ATM call (same middle strike)
- Buy 1 OTM call (higher strike - protection)
Iron Butterfly Example
Stock is at $100.
- Buy $95 put for $0.50
- Sell $100 put for $2.50
- Sell $100 call for $2.50
- Buy $105 call for $0.50
Net credit: $4.00 ($400 per contract)
Max profit: $4.00 if stock is exactly at $100 at expiration
Max loss: $1.00 ($100) if stock is below $95 or above $105
Breakeven: $96 and $104
When to Use an Iron Butterfly
- Low volatility expected: You think the stock will not move much
- High IV environment: You want to collect premium from elevated volatility
- Pinning expected: Stock tends to pin at a round number near expiration
- After big moves: Stock has moved big and you expect consolidation
Iron Butterfly vs Iron Condor
- Iron butterfly: Short strikes at same price. Higher credit but narrower profit zone.
- Iron condor: Short strikes at different prices. Lower credit but wider profit zone.
- When to choose butterfly: When you have strong conviction the stock will stay put
- When to choose condor: When you want more room for error
Risks of Iron Butterflies
- Need precision: Maximum profit only if stock is exactly at the middle strike
- Narrow profit zone: Stock can easily move outside your profitable range
- Assignment risk: Short options can be assigned early
- High commission costs: Four legs means four sets of commissions
Tips for Trading Iron Butterflies
- Use on stocks that tend to pin at round numbers
- Trade when IV is high to collect more premium
- Manage early - take profits at 25-50% of max profit
- Consider closing before expiration to avoid pin risk
Track Your Iron Butterfly Trades
Pro Trader Dashboard tracks all your multi-leg options strategies. See how your butterflies perform over time.
Summary
An iron butterfly is a neutral strategy that profits when the stock stays at a specific price. It collects more premium than an iron condor but has a narrower profit zone. Use it when you have strong conviction the stock will not move and IV is elevated.
Learn about related strategies: iron condors or straddles.