Inverse Iron Butterfly

A long straddle with both wings sold: it opens for a debit and gains when the underlying moves away from the body strike, up to the width of a wing.

Also called Long iron butterfly, Reverse iron fly

Outlook

Volatility

Family

Neutral

Level

Advanced

Legs

4 legs

Expirations

1 expiration

Opens for

Debit

Maximum profit

Limited

Maximum loss

Limited

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
B	Long	Put 100	1	At the money
A	Short	Put 90	1	10.00 points further out of the money than B
B	Long	Call 100	1	At the money
C	Short	Call 110	1	10.00 points further out of the money than B

What it is

A put and a call bought at the same strike B, with a put sold at A below and a call sold at C above. Four legs, one expiration.

It is a long straddle with both wings sold, and the reverse of the iron butterfly. The sold wings reduce the debit and cap the gain at the wing width.

The payoff

At expiration

A V with flat ends: the full debit is lost at the body strike B and the gain is capped beyond the wings A and C.

• At B — everything expires worthless and the whole debit is lost, at exactly one price.
• Between A and B, or between B and C — one long leg is in the money and the result climbs toward the maximum gain.
• Below A or above C — that side is worth its full width and the gain stops.

Maximum gain is the wing width less the debit. Break-evens are B minus the debit and B plus the debit — the same as a long straddle’s, because inside the wings the two are identical.

How it behaves before expiration

Today, before expiration

Today's value is a shallow curve above the V, with a rounded bottom at B and rounded corners at the wings.

The bottom at B is rounded, so the full debit is not lost until expiry. As with its inverse, most of the structure’s movement happens late: the at-the-money legs carry the most time value and lose it fastest at the end.

The Greeks

Delta is near zero at B and builds in either direction.

Gamma is positive at B and negative at the wings.

Theta is negative and concentrated at B.

Vega is positive and small — the long body and short wings partly offset.

Where it lives in the volatility environment

Practitioners describe it as the cheapest defined-risk way to hold a long-volatility view at a single strike, and compare it to a long straddle on whether a move beyond the wings is expected: past them, the straddle keeps gaining and this does not.

What can go wrong

• The worst case is at the strike everyone expects it to be near. A quiet expiry at B loses the entire debit.
• The gain is capped at the wing width. A large move pays no more than a moderate one that reaches the wing.
• Short wings carry assignment risk, on either side, and both can be tested over the life of the structure.
• Four legs to open and close, and the wings are usually the wider markets.
• A partially closed structure is a vertical spread or a naked option, depending on what was left.

Building it in Option Panel

Open Build Strategy and pick Inverse Iron Butterfly. The body strike is chosen once for both long legs; the wings are offsets from it.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Iron Butterfly — the other side.
• Long Straddle — the same body without the sold wings: a larger debit and no cap.
• Inverse Iron Condor — the same idea with the long strikes apart.