What is an Iron Butterfly? A Simple Guide
An iron butterfly is a defined-risk, range-bound strategy similar to an iron condor, but with the sold call and put at the same strike. This gives a higher peak profit but a narrower profit zone. It profits when the underlying stays near the central strike.
An iron butterfly is a tighter, higher-reward version of the iron condor. It bets that price will finish very near a specific level.
We will cover the idea, an example, and the practical takeaways. You can trade it on Stockk.
Key Takeaways
- It is a defined-risk, range-bound strategy.
- The sold call and put share one central strike.
- It has a higher peak profit than a condor.
- Its profit zone is narrower than a condor.
- The long wings cap the risk.
How does it differ from an iron condor?
In an iron condor the sold call and put are at different strikes, creating a flat profit zone. In an iron butterfly they share the same central strike, creating a single peak. This gives the butterfly a higher maximum profit but a narrower zone where it pays off. The long wings cap risk in both.
Suppose NIFTY trades at 22,600. You sell the 22,600 call and put for ₹180 each, collecting ₹360, then buy the 23,000 call at ₹45 and the 22,200 put at ₹40 as wings, paying ₹85. The net credit is ₹275, which is the maximum profit if NIFTY pins exactly at 22,600. The wings cap the loss at ₹125, and the breakevens are 22,325 and 22,875.
When to use an iron butterfly
An iron butterfly suits a strong expectation that price will finish very near a specific level by expiry. It collects more premium than a condor but needs the price to pin near the central strike. The defined risk makes it a controlled bet on low movement around a precise target.
Butterfly vs condor
| Feature | Iron Butterfly | Iron Condor |
|---|---|---|
| Short strikes | Same (one) | Different (two) |
| Peak profit | Higher | Lower |
| Profit zone | Narrow | Wider |
Ready to put this into practice? Stockk lets you trade iron butterfly and other strategies, with Indira Securities as your SEBI-registered broker. A demat account is free to open, and the Knowledge Center has more guides like this one.
Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.
Frequently Asked Questions
How is an iron butterfly different from a condor?
The butterfly's sold options share one strike, giving a higher peak but narrower zone, while the condor spreads them for a wider zone. Both cap risk.
What is the maximum profit?
It is the net credit, realised if price finishes at the central strike, where profit peaks. The zone is narrow.
What is the maximum loss?
It is the wing width minus the net credit, capped by the long options. Risk is defined.
When is an iron butterfly ideal?
When you strongly expect price to pin near a specific level by expiry. It collects more than a condor, with a narrower zone as the trade-off.
Is an iron butterfly risky?
Its risk is defined by the wings, but the narrow zone means it often misses, so precision is needed.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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