Lesson Overview

Iron Butterfly

An iron butterfly is a combination of a short straddle and iron condor. It's a great strategy to use during very high IV setups when you want to also reduce the capital required to hold the trade.

You'll build this strategy by selling both the ATM call and put strike (similar to a straddle) and then buying further OTM wings for protection (like an iron condor). The key is to use a wider spread in the strike prices to maximize the credit received.

For example, if a stock is trading at $50 you would sell the ATM call and put at $50 strike and then look to buy maybe the $45 or $40 puts below the market and the $55 or $60 calls above the market. The wider you can make the strategy the more credit received and higher probability of success.

More Discussion

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  • Very helpful. Thanks!
    When opening an Iron Condor w/ an expiration date 60 days out, how long do you typically stay in the trade?

    • Until it reaches our profit targets of generally 50% of the credit received.

      • Gotcha. It’s not time, but profit %. So could be a day. Could be 60 days …

      • You got it!

  • It’s a personal choice and based on risk tolerance. The wider you go the cheaper the long options will cost, leaving a bigger potential profit, but more margin to hold the position.

  • Yes high IVR generally over 70 – we don’t hold until expiration as we’ll more often than not simply close and take money off the table early.

  • Paul Bobrowski

    Hi Kirk,

    Another informative video. My question is, as it is with all credit spreads when you sell near ATM, what happens upon exercise? Isn’t it possible that the calls/puts I am writing get exercised? Can you talk about the probability and mechanics of that?

    thanks

    paul

    • If that happens then they cancel each out her out. You get assigned shares to purchase and sell with net out. Also we usually try to manage positions before expiration week to avoid this issue.

  • Correct (plus commissions etc.)

  • Depends on the objective and goals for the trade. When IV is high, iron butterfly is better.

    • Lee Cheng Qian

      Hmm, still seems to me that you would almost always lose money from one side of the trade in an iron butterfly. I dont quite understand how this is safer or better than iron condor. Kirk can u shed some light?

  • Yep it’ll go in as 2 different spreads.

  • You need to add it as a custom study.

  • scottie

    Hi Kirk. Quick sanity check: if i have an Iron Fly on and only my short ITM call gets excercised, (and the long call is OTM) that turns into 100 short shares. Correct? And if the OTM call has expired, purchasing another close OTM call would protect my upside. Correct?
    Thanks.

    • Yes short 100 shares. If you wanted to old this and protect from upside, yes buy another call at a higher strike.

  • Iron butterfly is a straddle with protective wings. A regular butterfly uses only one set of short ATM options (either calls or puts) and generally has a much lower window to profit.

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