What is an Iron Butterfly Strategy?

An iron butterfly strategy involves using four options contracts: two calls and two puts, with the same expiration date but spread across three different strike prices. This strategy combines elements of both a straddle and a strangle. It aims to profit when stock prices move significantly or stay near a specific price, with both potential profit and risk being limited.

Long Iron Butterfly

A long iron butterfly is used when you expect significant price movement of the underlying security. This strategy involves:

• Buying a put and a call at the middle strike price.
• Selling a put at a lower strike price.
• Selling a call at a higher strike price.

It is established for a net debit, meaning both potential profit and maximum risk are limited. The maximum profit is achieved if the stock price is above the highest strike price or below the lowest strike price at expiration.

Short Iron Butterfly

A short iron butterfly is employed when you expect the price of the underlying security to stay stable or move near the middle strike price. This strategy involves:

• Selling a put and a call at the middle strike price.
• Buying a call at a higher strike price.
• Buying a put at a lower strike price.

It is established for a net credit, with both potential profit and maximum risk being limited. The maximum profit is realized if the stock price is at the middle strike price at expiration.

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Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options.