Iron Butterfly Strategy
Maximum premium collection with defined risk — the best of both worlds.
What is the Iron Butterfly Options Strategy?
An Iron Butterfly is like a short straddle but with a safety net. You sell both an ATM call and put (collecting lots of premium) and add two outside options to cap your maximum loss. More premium than an Iron Condor, but a much narrower profit zone.
Why is it Called "Iron Butterfly"?
The payoff chart shows a tall peak in the middle with wings on either side — like a butterfly. "Iron" means it uses both calls and puts.
How Does the Iron Butterfly Trade Work?
- 1 Step 1 — Pick a strike where you think the stock will close at expiry.
- 2 Step 2 — Sell one call AND one put at this center strike.
- 3 Step 3 — Buy one call further above. Buy one put further below.
- 4 Step 4 — All four have the same expiry.
- 5 Step 5 — If stock closes near center, keep the big premium.
Types of Iron Butterfly Strategies
Iron Butterfly (Credit — Standard)
Sell ATM call and put. Buy OTM wings. Large credit. Narrow profit zone centered at the sold strike.
When to Use the Iron Butterfly Strategy?
- When you expect the stock to pin near a specific level
- Monthly expiry near max pain
- When you want max premium with defined loss
- Very expensive options
Profit and Loss of the Iron Butterfly
Before looking at the chart, here is a plain-English summary of what you can make and what you can lose.
The large net credit collected.
Wing width minus credit collected.
Lower: center strike − credit. Upper: center strike + credit.
Iron Butterfly Payoff Diagram
The chart below shows how profit/loss changes with the underlying price at expiry. Green zone = profit, red zone = loss.
Iron Butterfly Example Trade
| Action | Type | Strike | Premium |
|---|---|---|---|
| Sell | Call | ₹22,000 | +₹320 |
| Sell | Put | ₹22,000 | +₹290 |
| Buy | Call | ₹22,500 | -₹60 |
| Buy | Put | ₹21,500 | -₹55 |
NIFTY closed at ₹22,020. Kept most of ₹495.
Pros & Cons of the Iron Butterfly
- Collects more premium than Iron Condor
- Maximum loss is defined
- Great on expiry days
- Manageable for experienced beginners
- Very narrow profit zone
- Lower probability than Iron Condor
- Four legs = four fees
- Needs good timing
Iron Butterfly Frequently Asked Questions
Quick Quiz
Answer all questions and check your score.
1 An Iron Butterfly has its two sold options:
2 Compared to an Iron Condor, an Iron Butterfly:
3 The profit zone of an Iron Butterfly is:
4 Maximum loss on an Iron Butterfly is:
5 Iron Butterfly has defined risk because: