Some stocks seem glued to one price. An iron butterfly is built for those: you sell a call and a put at the same strike, right where the stock is trading, and buy protection on both sides. You collect a big credit, and you keep the most of it if the stock barely moves.
How it’s built
Four options on the same stock, with the same expiration:
- Sell an at-the-money call.
- Buy a higher-strike call to cap the risk on a rally.
- Sell an at-the-money put at the same strike as the call.
- Buy a lower-strike put to cap the risk on a drop.
It’s an iron condor with the two short strikes pushed together. Because at-the-money options are the most expensive, the credit is much bigger. The catch is that the full profit only comes if the stock finishes right at that strike.
Max profit, max loss and break-even
| Iron butterfly | |
|---|---|
| Max profit | The net credit, if the stock finishes exactly at the short strike |
| Max loss | Wing width − net credit |
| Upper break-even | Short strike + net credit |
| Lower break-even | Short strike − net credit |
Worked example
Microsoft ($MSFT) is at $300. You sell the $300 call and the $300 put, buy the $310 call and buy the $290 put. Say that brings in a $6 credit, or $600. (Actual premiums vary.)
- Break-evens: $294 and $306.
- MSFT finishes at $300: everything you sold expires worthless and you keep the full $600.
- MSFT finishes at $303: the $300 call costs you $3 to close, so you keep $300.
- MSFT above $310 or below $290: you lose the maximum, $10 − $6 = $4 a share, or $400.
Compared with an iron condor on the same stock, you collect more and your max loss is smaller, but the range where you keep everything shrinks to a single price.
When it makes sense
- The stock is pinned near one price with no clear trend.
- You expect very little movement and no news before expiration.
- Implied volatility is high and likely to fall, for example right before it collapses after an event, which makes the options you’re selling expensive.
What to watch out for
- The profit zone is narrow. Even a small move away from the strike starts eating into the credit.
- Big moves. A breakout in either direction takes you toward the max loss.
- Assignment. One of the short options is almost always in the money at expiration, so manage or close the position before then. See options assignment risk.
Tips
- Don’t hold for the perfect pin. Taking 25–50% of the credit early is a common target.
- Center it on a price the stock respects, like a level it keeps returning to.
- Size it for the max loss, not the credit.
For a full side-by-side, see iron condor vs iron butterfly.