Strategy · Butterflies & Condors

LONG IRON BUTTERFLY

VolatileDefined riskAdvanced

Overview

Buy an at-the-money straddle (long call + long put at the same strike) and sell OTM options on both sides as wings. The sold wings reduce the straddle cost and cap maximum profit. Profits from a large move in either direction that pushes the stock beyond one of the outer wings.

What it does

You're buying the ATM straddle (bullish on a big move) but selling OTM wings to reduce the cost. The wings give you a discount on the straddle at the cost of capping your maximum profit. If the stock makes an enormous move beyond the outer strikes, you stop participating — but for a moderate large move, this provides excellent risk-adjusted exposure.

Structure

buy 1 ATM call + buy 1 ATM put + sell 1 OTM call + sell 1 OTM put

Setup

1.Buy 1 ATM Call.
2.Buy 1 ATM Put (same strike as the call).
3.Sell 1 OTM Call (upper wing).
4.Sell 1 OTM Put (lower wing). Same expiration.

Max profit

(Wing Width − Net Debit) × 100. E.g., AAPL: ($10 − $6.70) × 100 = $330. Achieved if AAPL closes at or beyond either outer wing.

Max loss

Net Debit Paid. E.g., $6.70 × 100 = $670. Occurs if AAPL closes exactly at the center strike.

Breakeven

Center Strike − Net Debit (lower) and Center Strike + Net Debit (upper). E.g., $143.30 and $156.70.

When to use

When you expect a large move in either direction but want to reduce the cost of a pure straddle using sold wings.

When to avoid

When low volatility is expected or the stock is likely to stay near the center strike.

Example trade

Stock: AAPL at $150
Buy 1 AAPL $150 Call at $5.00
Buy 1 AAPL $150 Put at $4.80
Sell 1 AAPL $160 Call at $2.00
Sell 1 AAPL $140 Put at $1.80
Net Debit: ($5.00 + $4.80 - $2.00 - $1.80) = $6.00 ($600)
Expiration: 30 days

Max Profit: ($10 - $6.00) × 100 = $400 (if stock moves to $160 or $140)
Max Loss: $600 (if AAPL stays at $150)
Breakeven: $144 and $156

Common mistakes

×Entering when IV is already extremely high — the straddle cost is inflated and needs an even bigger move to profit.
×Choosing wings too far out — reduces the cost insufficiently; not worth the complexity.
×Choosing wings too close — severely caps profit on a large move.
×Holding through events without an exit plan — define a target move and profit level before entering.
×Not understanding the trade is debit-based — you need the stock to actually move to profit.

FAQ

How is this different from a long straddle?

A long straddle has unlimited profit from large moves. The long iron butterfly caps max profit at the outer wings — but costs significantly less to enter.

When should I use a long iron butterfly vs. a long straddle?

Use a long iron butterfly when straddle prices are expensive and you expect a specific magnitude of move (not an unlimited run). The reduced cost improves your breakeven.