What is an iron butterfly?
An iron butterfly is a short straddle with protection. You sell a call and a put at the same middle strike, then buy a further put below and a further call above.
The two shorts generate most of the credit. The wings cost part of it and set the maximum loss. Everything is in one expiration.
When traders use it
Traders sell iron butterflies when they have a specific price in mind and want the largest credit a defined-risk structure can pay.
- You expect the stock to finish close to a particular strike.
- Implied volatility is high and you want to sell it aggressively.
- A condor's credit is too small for the capital it ties up.
The P/L shape
The payoff is a sharp tent. The peak is at the middle strike and the sides fall away quickly to the wings.
Worked example. XYZ trades at $100. You sell the $100 call and the $100 put, and buy the $90 put and the $110 call. Total credit $6.00, or $600.
- Max profit
- $600 — the credit, if XYZ closes exactly at $100
- Max loss
- $400 — the $1,000 wing width minus the credit
- Breakevens
- $94.00 and $106.00
You risk $400 to make up to $600 — better odds than a condor pays. The catch is that the full $600 needs a close at exactly $100, and anything outside $94 to $106 loses everything.
Greeks and time decay
Delta is near zero at the middle strike and turns against you fast in either direction. Gamma is sharply negative, and it gets worse every day closer to expiration.
Theta is large and positive, concentrated in the two at-the-money shorts. Vega is strongly negative: this is a short-volatility position, and a spike hurts it before price has moved.
Build it in DeltaForm
- Open the builder and choose the symbol and expiration.
- Add a short call and a short put at the same middle strike.
- Add a long put below and a long call above, equally spaced.
- Check the credit and read both breakevens off the payoff curve.
- Move the date forward to see how narrow the profitable range becomes.
Frequently asked questions
Iron butterfly or iron condor?
The butterfly pays more and wins less often. The condor pays less and wins more often. Which suits you depends on how confident you are about where price lands, not on which looks better on paper.
What if the stock ends between the middle strike and a wing?
You keep part of the credit. The result slides linearly from the full credit at the middle strike down to the maximum loss at the wing.
Should the wings be equally spaced?
Not necessarily. Skewing one wing shifts your breakevens and your directional bias. Model the skewed version before you trade it — the numbers change more than they look like they should.