Iron Butterfly

AAA

DEFINITION of 'Iron Butterfly'

An options strategy that is created with four options at three consecutively higher strike prices. The two options located at the middle strike create a long or short straddle (one call and one put with the same strike price and expiration date) depending on whether the options are being bought or sold. The "wings" (options at the higher and lower strike prices) of the strategy are created by the purchase or sale of a strangle (one call and one put at different strike prices but the same expiration date). This strategy differs from the butterfly spread because it uses both calls and puts, as opposed to all calls or all puts.

INVESTOPEDIA EXPLAINS 'Iron Butterfly'

The iron butterfly strategy limits the amount of risk and reward because of the offsetting long and short positions. If the price falls dramatically and the investor holds a short straddle at the center strike price, the position is protected because of the lower long put. Conversely, when the price of the stock rises the investor is protected by the upper long call.

RELATED TERMS
  1. Call

    1. The period of time between the opening and closing of some ...
  2. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  3. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  4. Iron Condor

    An advanced options strategy that involves buying and holding ...
  5. Long Straddle

    A strategy of trading options whereby the trader will purchase ...
  6. Straddle

    An options strategy with which the investor holds a position ...
RELATED FAQS
  1. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How do I determine the breakeven point for a short put?

    The breakeven point for a short put is the strike price of the option minus the premium. Selling puts is a way for traders ... Read Full Answer >>
  5. What options strategies are best suited for investing in the retail sector?

    Retail is a broad sector whose seven discrete segments all exhibit greater volatility than the broader market. The sector ... Read Full Answer >>
  6. What techniques are most useful for hedging exposure to the telecommunications sector?

    A couple of option strategies can be used to hedge exposure to the telecommunications sector. Certain option strategies can ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    What To Do When Your Options Trade Goes Awry

    Check out some repair strategies to help boost the profit potential of a losing position.
  3. Options & Futures

    Advanced Option Trading: The Modified Butterfly Spread

    This strategy provides traders with the flexibility to craft a position with unique risk/reward characteristics.
  4. Investing Basics

    Explaining Absolute Return

    Absolute return refers to an asset’s total return over a set period of time. It’s usually applied to stocks, mutual funds or hedge funds.
  5. Investing Basics

    How To Create Capital Protected Investment Using Options?

    Does "Capital-Protection" guarantee in an investment product sound attractive? Wait! Here's how you can create a better one for yourself, at low-cost!
  6. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  7. Investing

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  8. Mutual Funds & ETFs

    5 Disadvantages of Mutual Funds Compared to ETFs

    In the mutual funds vs. exchange-traded funds debate, ETFs have some clear advantages.
  9. Options & Futures

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  10. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!