Iron Butterfly
An iron butterfly is a defined-risk, credit options strategy built around a target price. It combines a short straddle at one strike with protective long wings on either side.
Key Facts
- Market Outlook
- Neutral — expects the underlying to finish very close to the middle strike.
- Construction
- Sell a put and a call at the same middle strike, and buy a lower-strike put and a higher-strike call as protection (the “wings”), all with the same expiration. Opened for a net credit.
- Max Profit
- The net credit, if the underlying finishes exactly at the middle strike.
- Max Loss
- The width of the wider wing (the distance from the middle strike to that wing's long strike) minus the net credit, if the underlying finishes at or beyond that long strike. If both wings are the same width, this is simply the wing width minus the net credit. On the narrower side, the loss is capped lower, at that wing's width minus the net credit.
- Breakeven(s)
- Two: middle strike − net credit, and middle strike + net credit.
- At Expiration
- Profit is highest at the middle strike and falls in a straight line to the maximum loss at each long strike.
Per share, at expiration (at the near-term expiration for calendar and diagonal spreads). Assumes the position is held until then and ignores commissions, taxes, dividends and early assignment.
Defined Risk. Collected Up Front.
Iron butterfly — a credit received at entry, with capped risk on both sides.
Illustrative example — not live market data.
Manual Market — Go Beyond a Single Expiration
Manual Market lets you set expiration dates independently for each leg and model positions with your own inputs — without depending on OptionLab's built-in US or Israel market data. Explore more advanced positions shaped by both price and time.
Related Strategies
How It Works
An iron butterfly uses four legs, all at the same expiration: buy a lower-strike put, sell a middle-strike put, sell a middle-strike call, and buy an upper-strike call. The short put and short call share the exact same middle strike — that shared strike is what distinguishes an iron butterfly from an iron condor, which uses two separate short strikes instead.
Because the two short legs are sold at the same time the two wings are bought, the position opens for a net credit — and both the maximum profit (that credit) and the maximum loss are defined from the start. Profit is highest when the price finishes right at the middle strike, and shrinks as the underlying moves away from it in either direction.
Worked Example
This example uses its own inputs and is separate from the illustrative chart above.
- Underlying price: $100
- Time to expiration when premiums were calculated: 30 days
- Implied volatility: 25%
- Risk-free rate: 5%
- Premiums: theoretical values from OptionLab's Black-Scholes function — the same model as OptionLab's Black-Scholes Calculator. They are not live market quotes.
- Results: calculated at expiration by OptionLab's exact payoff engine.
- Amounts: per share. Contract-level amounts depend on the contract multiplier — for example, multiply by 100 for standard US equity options.
| Leg | Option | Strike | Premium |
|---|---|---|---|
| Buy 1 | Put | $90 | $0.19 |
| Sell 1 | Put | $100 | $2.65 |
| Sell 1 | Call | $100 | $3.06 |
| Buy 1 | Call | $110 | $0.36 |
| Net Credit | Max Profit | Max Loss | Breakevens |
|---|---|---|---|
| $5.16 | $5.16 | $4.84 | $94.84 and $105.16 |
At expiration: If the underlying finishes exactly at $100, all four options expire worthless and the full $5.16 credit is kept. At or below $90, or at or above $110, one $10-wide wing is fully in the money, so the loss is $10.00 − $5.16 = $4.84.
Build an Iron Butterfly in OptionLab
Select the Iron Butterfly strategy in OptionLab, then adjust the strikes and contracts you want to analyze. OptionLab shows you the payoff graph, breakeven points, and maximum profit and maximum loss as soon as your legs are in place.
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