Strategy reference
Iron Butterfly
An iron butterfly is a four-leg position that earns its maximum profit only if the stock pins exactly at the middle strike. Larger credit than a comparable iron condor; tighter profitable range.
Structure
Four legs at three distinct strikes (the two middle legs share a strike), all expiring on the same date: buy a put at the lowest strike, sell a put and a call both at the middle strike (typically near where the stock is trading), and buy a call at the highest strike. Equivalent to selling a straddle at the middle strike with a long strangle wrapped around it for protection.
Payoff at expiration
At expiration, you make your maximum profit — the credit you collected — only if the stock finishes exactly at the middle strike. Your worst case on each side equals the width of that side's wing minus your credit, which happens if the stock finishes outside the outermost strikes. Two breakevens: the middle strike minus your credit, and the middle strike plus your credit.
- Stock price
- $100
- Buy
- 1 × $95 put @ $1.50
- Sell
- 1 × $100 put @ $3.50
- Sell
- 1 × $100 call @ $3.50
- Buy
- 1 × $105 call @ $1.50
- Net credit
- $4.00
- Max gain
- $4.00 at S = $100
- Max loss
- $1.00 at S ≤ $95 or S ≥ $105
- Breakevens
- $96.00 and $104.00
Frequently asked questions
What is an iron butterfly?
An iron butterfly is a four-leg credit strategy: a short at-the-money straddle (a put and a call sold at the middle strike) wrapped by a long strangle for protection. All legs share the same expiration.
What is the maximum profit on an iron butterfly?
The maximum profit is the net credit collected. You realize it only if the stock finishes exactly at the middle strike at expiration.
What is the maximum loss on an iron butterfly?
The maximum loss equals one wing’s width minus the credit collected. It occurs at any expiration price outside the outer strikes.
This page is an educational reference, not investment advice. Numbers in the worked example are approximations for illustration only — real option prices depend on volatility, interest rates, dividends, and time to expiration. See the full disclaimer for details.