Iron Butterfly

Overview

The Iron Butterfly is the "aggressive cousin" of the Iron Condor. While the Iron Condor gives you a wide profit zone, the Iron Butterfly is a more concentrated bet that the stock will end exactly at a specific price.

Because you are selling options right at the current price (At-the-Money), you collect a massive amount of premium, which creates a very high reward-to-risk ratio.

[!IMPORTANT] This is a Short Volatility trade. You are selling the market's fear. If the market becomes calm and stays still, you win big.

The Setup

An Iron Butterfly consists of:

1. Outer Put ($K_L$): Long Put (Protection)
2. Body ($K$): Short Put AND Short Call (The Income Engine)
3. Outer Call ($K_U$): Long Call (Protection)

Mechanics: The "Spike" of Profit

• Max Profit: Occurs at exactly Strike $K$. In an Iron Butterfly, your payoff graph looks like a steep mountain peak.
• Credit: Because you are selling both the call and the put directly at the money, the credit you receive is much higher than a standard Iron Condor.

Payoff and Break-even

Max Profit

The total net credit collected upfront.

$$\text{Max Profit} = \text{Net Credit}$$

Max Loss

The width of your wings minus the credit collected.

$$\text{Max Loss} = (\text{Strike Width}) - \text{Net Credit}$$

Break-even Points

• Upper BE: $\text{Strike} + \text{Net Credit}$
• Lower BE: $\text{Strike} - \text{Net Credit}$

The "Gamma" Gamble

Iron Butterflies have some of the most dynamic Greeks in the option world.

1. Theta: The Revenue Line

Iron Butterflies have massive positive Theta. You are collecting time decay from both the call and the put. Every day that passes without a big move is a significant win.

2. Gamma: The Explosive Risk

Because you sold options right at the money, your Gamma is very high. If the stock starts to move, your Delta will flip rapidly against you. This is why Iron Butterflies can feel "nervous" as expiration approaches.

3. Vega: Short Fear

You are "Short Vega." If Implied Volatility drops (a "vol crush"), the value of your mountain peak grows even if the stock price doesn't change.

When to Use?

• Pinning the Price: You have high confidence the stock will stay flat.
• Post-Earnings Vol Sell: Entering right when IV is highest, expecting it to collapse.
• High-Income Target: You want to maximize your credit received per dollar of margin.

Checklist for Entry

• Is my "mountain peak" centered on a realistic price target?
• Is the credit received at least 1/3 of the total width of the wings?
• Am I prepared to close or "roll" the trade if the stock moves even slightly?

Iron Butterfly vs. Iron CondorRead more

Think of the Iron Butterfly as an Iron Condor where the middle strikes have been squished together.

Feature	Iron Condor	Iron Butterfly
Probability of Profit	High	Low
Max Reward	Low	High
Profit Zone	Wide	Narrow
Best For	Consistency	Home Runs

Professional traders often use butterflies when volatility is extremely overpriced, as the "theta capture" is significantly higher.