Iron Butterfly
Combining a short call and put at the same strike with protective wings to define risk and collect credit.
What is a Iron Butterfly?
Combining a short call and put at the same strike with protective wings to define risk and collect credit.
Construction
Sell a call and put at the center strike; buy a higher call and lower put as wings.
When it may be studied
To study a defined-risk short-volatility position with maximum profit concentrated near one price.
Expiration profile
Maximum risk: Wing width minus credit
Maximum reward: Net credit received
Break-even: Center strike plus or minus credit
Worked example
With a 100 center and 95/105 wings, receive $3.50. Simplified maximum loss is $1.50 per share; break-evens are $96.50 and $103.50.
Key risks and limitations
The profitable range can be narrow. Assignment, pin risk, and execution across four legs require careful planning.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.