Strategy guide
Iron Butterfly Strategy
An iron butterfly sells an at-the-money call and put and buys a higher call and lower put wing.
Strategy summary
- Market outlook
- neutral
- Risk type
- defined
- Capital requirement
- (Wing width − credit) × 100 per butterfly
- Maximum profit
- Net credit if price pins the short strike
- Maximum loss
- Wing width minus credit
- Theta / vega
- positive / negative
- Assignment risk
- high
- Typical use
- High-probability income when you expect the stock to pin a strike
Payoff at expiration
- Max profit$500.00
- Max loss-$500.00
- Breakevens$95.00, $105.00
How Iron fly works
It collects more premium than an iron condor in exchange for a narrower range and pin risk.
Exact option legs
Short ATM call + short ATM put + long call wing + long put wing
- BUY 1 × $90.00 put expiring 2026-01-16 at $0.90
- SELL 1 × $100.00 put expiring 2026-01-16 at $3.40
- SELL 1 × $100.00 call expiring 2026-01-16 at $3.40
- BUY 1 × $110.00 call expiring 2026-01-16 at $0.90
Payoff, breakeven and risk
At expiration the position is worth the intrinsic value of each leg. The maximum profit is $500.00, the maximum loss is -$500.00, and the position breaks even at $95.00 and $105.00.
Worked example
With the underlying at $100.00:
- The butterfly collects 5.00 for $10-wide wings.
- Maximum profit is $500 at 100 and maximum loss is $500 outside the wings.
- Breakevens are 95 and 105.
Strike selection
The short strike is the pin you expect; the wings set the maximum loss.
Expiration selection
Often traded near expiration to collect fast decay, which also raises pin risk.
Effect of time decay
This structure is positive on theta: net time decay works in its favour.
Effect of implied volatility
It is negative on vega: falling implied volatility helps.
Effect of stock movement
The position suits a neutral view, and it is tested most when the underlying moves outside the modelled strikes.
Assignment considerations
Assignment risk is high. Short legs can be assigned, especially when they are in the money or before a dividend; long legs have no obligation but can be exercised.
When it works poorly
- Trending or gapping markets.
- Wide spreads that worsen the fill.
- Earnings inside the expiration.
Common mistakes
- Trading around a catalyst that gaps the stock.
- Underestimating pin risk near expiration.
- Sizing too large for the narrow range.
Tax caveat
Option outcomes can receive different tax treatment from share trades, and assignment changes the holding period and cost basis. This is general information, not tax advice; confirm your situation with a qualified professional.
FAQ
- What is the maximum loss?
- The wing width minus the credit.
- When does it profit?
- When the stock finishes near the short strike at expiration.
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