Overview
An iron butterfly is a short straddle with wings. You sell the at-the-money call and put for a rich credit, then buy an out-of-the-money call and put to cap the risk. It offers a high reward-to-risk ratio but a narrower profitable zone than an iron condor.
The structure pays best when the underlying finishes right at the central strike, where both short options expire worthless. The wings make the worst case small and known — often only a fraction of the credit collected.
How it’s built
Sell an at-the-money call and put (the body), and buy an OTM call and put equidistant from the strike (the wings), same expiry. Net credit in; loss capped by the wing width.
| Action | Option | Strike | Premium | Role |
|---|---|---|---|---|
| Sell | Call (CE) | 24,000 | 180 | Sell — ATM call body |
| Sell | Put (PE) | 24,000 | 170 | Sell — ATM put body |
| Buy | Call (CE) | 24,200 | 90 | Buy — call wing |
| Buy | Put (PE) | 23,800 | 80 | Buy — put wing |
Payoff at expiry
The diagram is computed from the legs above on an illustrative NIFTY 50 snapshot — spot 24,000, one lot of 75.
Worked example — NIFTY 50
Expecting NIFTY to settle near 24,000, you sell the 24,000 call and put (180 + 170) and buy the 24,200 call and 23,800 put (90 + 80). The net credit is 180 points (₹13,500 per lot).
Maximum profit occurs if NIFTY expires exactly at 24,000. The worst case is just 20 points (the 200-wide wing minus the 180 credit, ₹1,500 per lot) — an unusually high reward-to-risk profile. Breakevens are 23,820 and 24,180.
At expiry
| If the market… | Outcome |
|---|---|
| NIFTY expires at 24,000 | Maximum profit — keep the full credit |
| NIFTY at 23,820 or 24,180 | Breakeven on either side |
| NIFTY beyond a wing | Maximum loss — small and capped |
Greeks & behaviour
When to use it
- You expect the market to pin near a specific level into expiry.
- You want a defined-risk version of a short straddle.
- Implied volatility is high and you want a strong reward-to-risk ratio.
Risks & caveats
- The profitable band is narrow — small moves can reach breakeven.
- Lower probability of maximum profit than an iron condor.
- Four legs to manage; pin risk near expiry on the body strikes.
Key takeaways
- A risk-defined short straddle with an excellent reward-to-risk ratio.
- Wants price to finish at the central strike.
- Narrower win zone than an iron condor — pick it for a strong pin view.
Test this on live data
Load the Iron Butterfly preset in the Strategy Builder to see real strikes, premiums and a live payoff graph.
Educational content only — not investment advice or a recommendation. All strikes, premiums and figures are illustrative and do not reflect live market quotes. Options carry significant risk; consult a registered adviser before trading.