Iron Butterfly: how the position works

An iron condor with the two short strikes collapsed onto the same price: sell an at-the-money straddle and buy a protective wing on each side. The credit is far larger than a condor's and the profitable range far narrower. It is a bet not merely that the underlying stays in a range but that it finishes close to a specific number.

Market view: Neutral — pinned
Opened for: Credit
Maximum profit: The net credit, and only if the underlying finishes exactly at the central strike.
Maximum loss: The wing width w, less the net credit.
Breakeven: K ± net credit, at expiry.

How it is built

Sell 1 call and 1 put at the central strike K
Buy 1 put at K − w and 1 call at K + w for protection
All four legs share an expiry

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Short vega and positive theta, both larger in magnitude than an iron condor at comparable width because at-the-money options carry the most of each. Gamma is sharply negative right at the centre — the position is at its most profitable and its most unstable at the same price, which is the tension that defines it.

When to use it

When you expect a specific level to hold and implied volatility to fall, typically after an event has passed and the surface is still elevated. It pays roughly twice what a comparable condor pays and demands a correspondingly precise view.

What goes wrong

The profitable range is narrow, usually only the credit either side of the strike, so it is wrong far more often than a condor.
Maximum profit requires an exact finish and is essentially never realised in full. Judge the trade by its value partway, not by the peak of the diagram.
Pin risk at the central strike is acute: with a short call and a short put at the same price, an ambiguous close leaves genuine uncertainty about the resulting stock position.

A worked example

SPY at 580, 30 days out. Sell the 580 straddle, buy the 560 put and the 600 call, for a net 9.20 credit.

Net credit received: $9.20 per share — $920 for one butterfly
Wing width: $20.00
Maximum profit: $920, only at exactly 580
Maximum loss: $1,080 ((20 − 9.20) × 100), at or beyond 560 or 600
Breakevens: $570.80 and $589.20

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these.

Common questions

Iron butterfly or iron condor?

The butterfly collects more and wins less often; the condor collects less and wins more often. Neither is structurally better — they sit at different points on the same trade-off, and the choice should follow how confident you are about the level rather than the range.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.