Snapshot
Legs
Sell 1 Low Put + Buy 1 Middle Put + Buy 1 Middle Call + Sell 1 High Call
Outlook
High Volatility / Direction Agnostic
Max profit
Difference between middle and outer strikes minus net debit paid
Max Loss
Net debit paid
A short iron butterfly option strategy involves selling an out-of-the-money put, buying an at-the-money put, buying an at-the-money call, and selling an out-of-the-money call. Opening this trade requires paying a net debit upfront. Traders use this strategy when they expect the underlying stock to break out violently in either direction away from the central strike price.
Your maximum profit is equal to the distance between adjacent strikes minus the net debit paid, achieved if the stock price moves beyond the outer strike prices by expiration. Your maximum loss is limited to the initial net debit paid, which occurs if the stock ends up resting right at the middle strike price when the options expire.
Example
Stock
$100
Trade
- Sell $95 Put for $1.75
- Buy $100 Put for $3.50
- Buy $100 Call for $3.50
- Sell $105 Call for $1.75
→ $3.50 debit ($350)
Breakevens
$96.50 / $103.50
Outcomes
- Stock at $100: -$350 Max Loss
- Stock at $96.50 or $103.50: $0 Breakeven
- Stock ≤ $95 or ≥ $105: +$150 Max Profit