Iron Butterfly

What is an iron butterfly?

An iron butterfly is a four-leg options strategy that sells a call and a put at the same strike and buys a lower-strike put and a higher-strike call, all in one expiration. It opens for a net credit and keeps all of it only if the stock finishes exactly at the shared strike. The long wings cap the loss on each side, so the maximum risk is known before the trade is placed.

The shared strike is the body. The standard short iron butterfly places both wings the same distance from the body, and all four legs share the underlying, expiration, contract deliverable, and quantity.

Its expiration payoff forms a tent with maximum profit at the body and flat loss limits beyond the wings. Traders often place the body near the current stock price; the shared strike defines the structure.

How trading costs move iron butterfly breakevens

The example’s $540 credit, $460 maximum expiration loss and $94.60/$105.40 gross breakevens assume no costs. With $8 total fees for one package, maximum expiration profit becomes $532, worst payoff becomes −$468, and breakevens move inward to $94.68/$105.32.

Use actual leg fills when calculating the credit. If $540 already reflects those fills, adding a separate estimated fill penalty would count the same slippage twice. Total fees are dollars for the whole position; multiplying the package quantity also requires reviewing the assumed total fee.

Iron butterfly P&L and Greeks before expiration

Add the signed Greeks from all four legs. At the body, the short options concentrate the position’s exposure to small price moves. As spot moves toward and beyond a wing, the relative exposure of the long and short options changes.

Use current net delta, gamma, theta, and vega to inspect that change. Reprice the complete package across the dates and volatility inputs in the trade plan. Closing profit equals the opening credit minus the debit paid to buy back the full position. The options profit calculator shows the profit peak, both breakevens, current position value, and target-date outcomes for all four legs in one view.

Iron butterfly vs iron condor

An iron condor separates the two short strikes. That creates an interval of maximum expiration profit. The butterfly puts both short options at one strike and earns maximum expiration profit at that single price.

Compare the actual credits, wing widths, breakevens, and dollar loss limits. Those figures reveal what each structure buys for the same market view.

Managing an iron butterfly and assignment

Use a combined order with a net price limit. To close, buy back the short call and put and sell both wings. For physically settled contracts held through expiration, map the shares created by each exercise or assignment and manage the resulting stock position.

On the options tape, inspect matching quantity, expiration, execution details, and the two trades at the shared strike to identify a four-leg package.

Risks and limitations of iron butterflies

• Place the body at your pin target. Full profit needs the stock at exactly $100 at expiration; each dollar away from the body gives back $100 of the $540 credit, so a finish at $97 keeps only $240.
• Size the trade from its $460 maximum loss. At expiration, the profitable range runs from $94.60 to $105.40, and the loss reaches its $460 maximum at either wing, $90 or $110.
• Track gamma and implied volatility while the trade is open. At the body the position is short gamma and short vega, so a fast move or a rise in implied volatility raises the cost to close before either breakeven is reached.
• The short call and put can be assigned on American-style contracts. A finish near $100 leaves both close to the money, so the final share position stays unknown until assignment notices arrive. Close the package before the final session to remove that risk.
• Calculate breakevens after costs. Four legs pay four bid-ask spreads on entry and exit, and the $8 fee example alone moves the breakevens from $94.60/$105.40 to $94.68/$105.32.

Bottom line

The $540 credit is all profit only with XYZ at $100, and each dollar away from the body gives back $100 until the breakevens at $94.60 and $105.40. Sell it when you expect a pin at one strike, and size it from the $460 maximum loss beyond either wing.