Iron Butterfly Strategy — Guide, Precision & Calculator

An iron butterfly is a precision neutral strategy that involves selling an at-the-money straddle and simultaneously buying protective wings (a call above and put below). This creates maximum credit collection with a very narrow profit zone, ideal for pinpoint price predictions.

Use the interactive chart below or jump to the setup guide to understand strike selection and precision trading for stable, low-volatility environments.

Interactive Payoff Chart

When to Use Iron Butterflies

• Outlook: Neutral; expecting stock to stay very close to current price.
• Volatility: High IV environments with expectation of significant IV crush.
• Precision: When you have strong conviction about a specific price target.
• Time decay: Short-term strategies to maximize theta benefits.

Setup: Strike Selection & Precision Trading

Four-Leg Construction

1. Sell ATM call: At current stock price for maximum premium
2. Sell ATM put: At same strike as the call (create short straddle)
3. Buy OTM call: Above current price for upside protection
4. Buy OTM put: Below current price for downside protection

Strike Selection Guidelines

• Center strike: Choose ATM or very close to current stock price.
• Wing distance: Typically 5-10 points away from center for adequate protection.
• Credit optimization: Balance wing distance with credit received.
• Liquidity: Ensure all strikes have tight bid-ask spreads for efficient execution.

Expiration

• 30–45 DTE optimizes time decay without excessive gamma risk.
• Shorter expirations for events where you expect minimal movement.
• Avoid earnings unless expecting a very muted reaction.

Want to optimize credit collection? Try the Iron Butterfly Calculator to compare wing distances and maximum credit scenarios.

Payoff, Breakeven & Greeks

• Max Profit: Net credit received (if stock stays at center strike).
• Max Loss: Wing distance minus net credit received.
• Breakeven points: Center strike minus credit; center strike plus credit.

Greeks (net position)

• Delta: Near zero at center; becomes directional as stock moves away.
• Theta: Positive; maximum time decay benefits near center strike.
• Vega: Negative; profits significantly from volatility crush.
• Gamma: Negative; risk accelerates quickly as stock moves away from center.

Management & Precision

• Early profit taking: Consider closing at 25-50% of max credit due to narrow profit zone.
• Precision monitoring: Watch stock price closely as small moves matter significantly.
• Volatility tracking: Monitor for IV crush opportunities post-events.
• Time management: Avoid holding through final week due to gamma risk.

Adjustment Techniques

• Converting to iron condor: Widen the profit zone by adjusting strikes.
• Closing early: Take profits quickly as profit zone is very narrow.
• Rolling center: Move entire position to follow stock if thesis changes.
• Partial closures: Close winning sides early while managing losing sides.

Worked Example (Illustrative)

XYZ at $150. Set up iron butterfly: Sell $150 call and $150 put for $8.00 total, Buy $145 put and $155 call for $2.00 total. Net credit: $6.00.

• Max profit: $6.00 if XYZ stays exactly at $150.
• Max loss: $-1.00 if XYZ moves beyond $145 or $155 (wing protection).
• Breakeven points: $144 and $156.
• Profit zone: Very narrow, only $12 wide.

The strategy requires precise prediction but offers excellent risk-reward ratio. Use the calculator to model different wing distances and credit scenarios.

Frequently Asked Questions

Disclaimer

This page is for educational purposes only and is not investment advice. Options involve risk and are not suitable for all investors. Consider consulting a qualified professional. Examples are illustrative and exclude fees/slippage.

Sources & further reading: Cboe Options Education · OCC Investor Resources