Iron butterfly: how it works
The iron butterfly is one of the standard options structures. This page explains its mechanics at expiry, before charges. It is a description for learning, not a suggestion to trade it, and it does not consider your circumstances.
- How it is built
- Sell a call and a put at the same strike and buy a further call and put as wings.
- Where it gains
- Keeps most of the credit if the underlying finishes near the short strike.
- Maximum loss
- Width of a wing minus the credit received.
- Maximum profit
- The net credit.
- Breakeven at expiry
- Short strike ± credit.
- Risks to watch
- Narrow profit zone; maximum profit only at one price.
Things that change the picture before expiry
- Implied volatility and time decay change option prices every day, so the value before expiry differs from the expiry payoff.
- Brokerage, taxes and slippage apply to every leg when entering and exiting.
- Margin for sold options can rise during the day; a structure with defined risk still needs margin.
- Liquidity and wide spreads on far strikes can make exits costly.
Related reading
Core strategies lesson · Reading a payoff diagram · Risk management · Glossary
Practise it on paper
Load the iron butterfly template in the strategy builder and watch its payoff, Greeks and risk with virtual money.
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