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. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  2. Strike Price

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

    A neutral option strategy combining bull and bear spreads. Butterfly ...
  4. Put

    An option contract giving the owner the right, but not the obligation, ...
  5. Strangle

    An options strategy where the investor holds a position in both ...
  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 >>
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. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  5. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.
  6. Options & Futures

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  7. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  8. Options & Futures

    The Fancy Way To Diversify Your Portfolio: Precious Metal Options

    A guide with strategies on how to invest or trade in precious metals by using options.
  9. Options & Futures

    When And How To Take Profits On Options

    Here are the different criteria to ensure maximum profit taking while trading options.
  10. Brokers

    OptionsXpress Vs. OptionsHouse: Which One To Pick?

    OptionsXpress and OptionsBroker -- each offers a price mix and set of services suitable for certain investors based on their trade approach and priorities.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center