The iron butterfly
An iron butterfly is a concentrated version of the iron condor. Instead of selling a put and call at separate strikes, you sell them at the same strike — at-the-money — and buy protective wings further out. The result is a larger credit and a higher peak profit, but a much narrower zone in which to win. It is a sharp bet that a stock pins near a specific price.
How it is built
Four options: sell the at-the-money put and call (the body) and buy a lower put and higher call (the wings). Stock at $100: sell the $100 put and $100 call (a short straddle), buy the $90 put and $110 call for protection, net credit $6. Peak profit is the full $6, earned only if the stock finishes exactly at $100. Away from $100 the profit shrinks; beyond the breakevens of $94 and $106 you lose, capped at the $10 wing width minus the $6 credit = $4.
| Outlook | Strongly neutral — expecting the stock to pin a price |
|---|---|
| Max profit | Net credit = $6/share, exactly at $100 |
| Max loss | (Wing width − net credit) = $4/share beyond the wings |
| Breakeven | $94 and $106 |
| Time decay (theta) | Works strongly for you — short the ATM body |
Both sell a range; the difference is concentration. The iron condor spreads its short strikes apart ($95/$105) for a smaller credit ($2) but a wider win zone. The iron butterfly stacks them at-the-money ($100/$100) for a bigger credit ($6) but a narrower, peakier payoff. The condor wins across a broad quiet range; the butterfly pays the most only if the stock lands near the strike. Choose the butterfly when you have a strong view that a stock pins a level — often a max-pain or expiration-pin thesis — and the condor when you just expect general calm.
When to use it
Use an iron butterfly when you expect a stock to settle near a specific price and implied volatility is high. Selling the at-the-money straddle collects the richest premium available, so the trade is most attractive when that premium is inflated — exactly the elevated-volatility condition a gauge like VolDex® makes visible. The higher credit is compensation for the narrower margin of error.
Common pitfalls
Underestimating how narrow the win zone is. The peak profit sits on a single point; realistic outcomes are usually partial. Don’t anchor on the maximum.
Short-gamma whipsaw. With short at-the-money options, a move in either direction hurts quickly — active management matters more here than almost anywhere.
What to do with this
The iron butterfly is the most concentrated premium-selling trade in this library: highest credit, narrowest target. With all twelve strategies in hand, the last track covers execution — how to actually run, adjust, and exit these positions.
You now have the full strategy toolkit. The Execution & Risk track covers how to actually run these trades — assignment, rolling, and sizing.