Contents

Iron Butterfly

Iron Butterfly is a neutral outlook strategy. It can be visualized as a combination of bull PUT spread and bear CALL spread.

It is built by buying a lower strike OTM PUT, selling an ATM CALL & PUT and buying a higher strike OTM CALL.

It is a popular positional strategy traded on the Index options for consistent income.

Trade Set-Up

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Buy 1 lower strike OTM PUT

Naked Put-Finvezto

Sell 1 ATM PUT

short put-Finvezto

Sell 1 ATM CALL

short call-Finvezto

Buy 1 higher strike OTM CALL

Naked Call 1-Finvezto

Iron Butterfly

butterfly-Finvezto

Entry Checklist

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Market Outlook
  • When you have a neutral outlook and expect the price to stay in a tight range.
  • Volatility
  • Initiate the strategy when the implied volatility levels are neither moving up or down and quite stable
  • Risk Profile

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    Risk [Loss]
  • Maximum Loss is limited to the difference between strike prices minus the net credit received
  • Reward [Profit]
  • Maximum profit is when the price ends at the strike price of sold ATM CALL or PUT
  • Break Even Point
  • Middle Strike plus or minus the net credit received
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful for the position as long as price stays closer to the ATM PUT or CALL
  • Volatility impact [Vega]
  • When the price is closer to the ATM CALL or PUT then you want the volatility to decrease
  • When price is closer to the bought PUT or CALL then you want the volatility to increase
  • Trade Management & Exit

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    Stop Loss & Exit
  • The strategy is highly profitable closer to the expiry. You can hold the position and not worry about stop loss as this position already comes with low risk.
  • Risk should be limited to 1-2% of your capital.