Iron Butterfly

An iron butterfly combines a bull put spread and a bear call spread that share the same short middle strike (often at-the-money). You collect net credit. Max profit occurs if the stock pins exactly at that middle strike at expiration. The profit zone is narrower than an iron condor, but credit relative to width can be attractive when implied volatility is elevated.

It is still a short-volatility, range-bound structure. Large moves hurt. Center the structure where you have a view, not only where spot prints today, if your horizon is several weeks.

Liquidity and execution

Four legs at one expiry demand liquid wings. If long wings are cheap but untradeable, your hedge is theoretical. Iron butterfly combo tickets reduce leg risk; if unavailable, have a legging plan that prioritizes covering shorts first when exiting.

Structure

Strikes: K1 < K2 = K3 < K4 (middle short put and short call at K2/K3)

Leg	Typical action
K1	Long put
K2	Short put
K3	Short call (same strike as K2)
K4	Long call

• Entry: Net credit.
• Max profit: Credit × 100 (stock at middle strike at expiry).
• Max loss: Wing width minus credit (per side, similar to condor math).
• Body width: Zero between short strikes (they are the same). Profit "tent" is sharp.

Example: stock $100. Long $90 put, short $100 put, short $100 call, long $110 call. Credit $4. Wing width $10. Max loss roughly $6 per share ($600) if stock finishes at $90 or $110 extremes.

Worked example

Stock at $100.

1. Put side: buy $90 put $0.50, sell $100 put $3.00.
2. Call side: sell $100 call $3.00, buy $110 call $0.50.
3. Net credit ≈ $4.00 ($400).

At expiry at $100, short options expire worthless (if OTM by a tick) or at zero intrinsic net; long wings expire worthless. You keep full credit if all shorts expire without intrinsic loss. At $105, call side may lose part of the credit. At $115, call wing approaches max loss.

Payoff at expiration

Stock at expiry	P/L direction
$100	Near max profit (+credit)
$95	Partial loss on put side
$105	Partial loss on call side
$90 or $110	Approaching max loss on breached wing

The chart peaks at the center strike and falls off faster than a condor's flat plateau.

Greeks for this position

• Delta: Near zero at entry if centered on spot. Shifts negative or positive as price drifts to a wing.
• Theta: Positive. You want time decay with price near the body.
• Vega: Negative. Rising IV hurts. Compare with vega explained.
• Gamma: Very negative near the short strike into expiry. Pinning helps; leaving the pin hurts quickly.

Iron butterflies concentrate gamma at one strike versus the condor's two short strikes separated by a gap.

When traders consider it

Prefer iron butterfly when	Prefer iron condor when
You expect price to finish near one level	You want a wider profit zone
IV is high (larger credit)	You accept lower credit for more room
You will manage aggressively near expiry	You want a flatter max-profit region

Versus long call butterfly: the long butterfly is a debit, long-vol pin bet; the iron butterfly is a credit, short-vol range bet.

Risks and management

• Pin risk: Expiration exactly at $100 with shorts at $100 creates assignment and settlement quirks. Know your broker's procedures.
• Liquidity: Four legs on the same expiry; fills matter.
• IV crush helps; IV spike hurts before you reach expiry.
• Commissions on four legs each way.

Center strike selection

ATM iron butterflies collect more premium but need a tighter pin. Slightly OTM centers shift bias and change which wing threatens first. Model both in the builder before live entry.

Common mistakes

• Expecting condor-like forgiveness while using butterfly width.
• Holding into expiry with shorts exactly ATM (assignment chaos).
• Confusing iron butterfly with long butterfly (opposite vol bias).
• Opening when IV is already crushed (little premium left).

Closing vs holding to expiration

Iron butterflies are difficult to hold through expiry at the short strike because both shorts may be ITM together. Many sellers close when a stated fraction of credit is captured or when spot touches a short strike with rising gamma. Waiting for a perfect pin is not a plan most accounts can repeat reliably.

Mark-to-market before expiration

Iron butterflies are sensitive to spot leaving the center. Small moves away from the short strike can erase open profit because gamma is concentrated. IV drops help marks; IV spikes hurt. The last week is where many traders either close for a fraction of max credit or accept wing risk.

Model a +2% and −2% spot shift in the builder with the same days to expiry to see asymmetric wing threat.

Tax and reporting (high level)

Same multi-leg reporting caveats as condors. Not tax advice.

Practice without capital

Center an iron butterfly on spot in ThetaViz, then move spot 1% away and watch gamma effects near the short strike. Repeat with an iron condor of similar wing width. Saving both models helps you see which structure fits your monitoring tolerance. Saved strategies and P/L.

Related guides

Compare iron condor and iron condor vs iron butterfly. Debit pin trade: long call butterfly. Vol context: vega explained.

Reading the payoff chart

Your iron butterfly chart should peak near the short strike and fall toward wing max loss. Asymmetry in wing width or credit will tilt the peak. Compare side by side with an iron condor on the same underlying in the builder. Reading payoff charts documents how flat plateaus and sharp peaks differ visually.

Try in ThetaViz

Model iron butterfly and compare breakevens with an iron condor on the same underlying date.

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ThetaViz provides educational tools only. This guide is not investment, tax, or legal advice. Prices, margin requirements, and tax rules change. Confirm details with your broker and qualified professionals before trading.