Iron Butterfly
Sell an ATM call and put and buy protective OTM wings to profit from the market pinning near a strike.
What is a Iron Butterfly?
An Iron Butterfly sells an at-the-money call and put (a short straddle) and buys an OTM call and put as protective wings. It collects a large credit and profits most if the underlying 'pins' exactly at the short strike at expiry. The trade-off versus an Iron Condor is a bigger credit but a much narrower profit zone. The payoff diagram forms a tent centred on the ATM strike.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Sell 1 ATM Call and 1 ATM Put (same strike).
- Buy 1 OTM Call and 1 OTM Put as wings.
- Net credit received = maximum profit at the centre strike.
When to Use It
Use when you strongly expect the market to stay near a specific level with low realised volatility. Best entered in high IV that you expect to collapse. Requires active management as price drifts from the centre.
The Greeks
Near-zero Delta at the centre, strongly Positive Theta, Negative Vega, Negative Gamma.
Risks & Considerations
- Very narrow profit zone — even a modest move erodes the large credit.
- High negative Gamma near expiry makes P&L swing sharply.
- Any decent trend breaches breakeven quickly.
Worked Example (Nifty)
Illustrative trade — lot size 75
Nifty 20,000. Sell 20,000 CE (₹200) + 20,000 PE (₹200) = ₹400; buy 20,400 CE (₹70) + 19,600 PE (₹70) = ₹140. Net credit = ₹260 × 75 = ₹19,500 (max profit at 20,000). Wings 400 wide → max loss = (400 − 260) × 75 = ₹10,500. Breakevens 19,740 and 20,260.