Iron Butterfly

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.

BREAKING DOWN '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. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly ...
  2. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  3. Straddle

    An options strategy in which the investor holds a position in ...
  4. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
  5. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  6. Bull Call Spread

    An options strategy that involves purchasing call options at ...
Related Articles
  1. Trading

    The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...
  2. Trading

    What is an Iron Butterfly Option Strategy?

    This relatively simple strategy is designed to provide a profit for investors who believe that there will be minimal price movement in the underlying security until expiration.
  3. Trading

    Get Familiar with These 6 Option Strategies

    When you’re ready to move beyond the basics of investing, it’s time to learn your options.
  4. Trading

    Profit On Any Price Change With Long Straddles

    In this strategy, traders cash in when the underlying security rises - and when it falls.
  5. Trading

    4 Popular Options Strategies for 2016

    Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016.
  6. Trading

    4 Options Strategies To Know

    Here is a quick introduction to four options strategies that traders should know.
  7. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  8. Trading

    Advanced Option Trading: The Modified Butterfly Spread

    This strategy provides traders with the flexibility to craft a position with unique risk/reward characteristics.
  9. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  10. Investing

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
RELATED FAQS
  1. What options strategies are best suited for investing in the financial services sector?

    Learn the options strategies top traders use to take advantage of the volatility in the financial services sector and the ... Read Answer >>
  2. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >>
  3. What's the difference between a straddle and a strangle?

    Straddles and strangles are both options strategies that allow the investor to gain on significant moves either up or down ... Read Answer >>
  4. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  5. What option strategies can I use to earn additional income when investing in the ...

    Learn about a couple of good options strategies that traders can use to enhance investing profitability when investing in ... Read Answer >>
  6. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center