Iron Butterfly

A short straddle with both wings bought: it opens for a credit that is kept in full only if the underlying finishes at the body strike, and the wings cap the loss.

Also called Iron fly, Short iron butterfly

Outlook

Neutral

Family

Neutral

Level

Advanced

Legs

4 legs

Expirations

1 expiration

Opens for

Credit

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	Short	Put 100	1	At the money
A	Long	Put 90	1	10.00 points further out of the money than B
B	Short	Call 100	1	At the money
C	Long	Call 110	1	10.00 points further out of the money than B

What it is

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

It is a short straddle with both wings bought back, and it stands in the same relation to that structure as the iron condor does to a short strangle: the unbounded loss becomes a defined one, paid for out of the credit.

The payoff

At expiration

A tent shape with a peak at the body strike B and flat ends beyond the wings A and C.

A tent:

• At B — everything expires worthless and the full credit is kept. This happens at one price.
• Between A and B, or between B and C — one short leg is in the money and the result slides toward the maximum loss.
• Below A or above C — that side’s spread is worth its full width and the loss stops.

Maximum loss is the wing width less the credit. Break-evens are B minus the credit and B plus the credit — the same pair as a short straddle’s, because between the wings the two structures are identical.

How it behaves before expiration

Today, before expiration

Today's value is a shallow mound far below the tent's peak, with all corners rounded.

The peak is barely a peak before expiry. Almost the whole of an iron butterfly’s credit is earned in its final days, because the at-the-money short legs are where time value is concentrated and it drains fastest at the end.

The structure is therefore quiet for most of its life and decisive at the close.

The Greeks

Delta is near zero at B and turns against the position in either direction.

Gamma is strongly negative at B — the same hazard as a short straddle, with the wings limiting where it can lead.

Theta is positive and larger than an iron condor’s, because the short legs are at the money.

Vega is negative. A rise in implied volatility is felt most at B, which is where this structure’s short legs sit.

Where it lives in the volatility environment

Practitioners describe the iron butterfly as the highest-credit, narrowest-range member of the defined-risk family: a larger credit than an iron condor of the same wing width, in exchange for a profitable range that is a point rather than a band. The comparison between the two is usually made on exactly those terms.

What can go wrong

• The full credit needs a pin. Anything other than B at expiry gives back part of it.
• Pin risk at B is real. Both short legs sit at the same strike, so a settlement close to it leaves assignment uncertain on either or both.
• Early assignment on the short put leaves long shares; on the short call, short shares. Both can happen at once.
• Four legs and eight crossings. The at-the-money legs are liquid, the wings usually less so.
• A partially closed butterfly is a vertical spread, sometimes an unhedged short option, depending on which legs were dealt with.

Building it in Option Panel

Open Build Strategy and pick Iron Butterfly. The body strike B is selected once and applied to both short legs; each wing is expressed as an offset from B, which fixes the width and therefore the maximum loss.

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

Related strategies

• Short Straddle — the same body without the wings, and without the bound on the loss.
• Iron Condor — the same idea with the short strikes apart: a smaller credit over a wider range.
• Inverse Iron Butterfly — the other side.