> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/option-strategies/iron-butterfly.md).

# Iron Butterfly

## Short Iron Butterfly

{% hint style="info" %}
A Short Iron Butterfly is a combination of selling an at-the-money Call and Put option, and buying an out-of-the-money Call and Put option (at the wings).
{% endhint %}

**Payoff Diagram:**

<figure><img src="/files/jBx9tQrllkDG2sFEQT6O" alt=""><figcaption></figcaption></figure>

**Direction Assumption:** Neutral

**Maximum Profit:** Limited to net credit received, which is calculated by credit received from selling the at-the-money Call and Put, minus the cost of buying the out-of-the-money Call and Put.

**Maximum Loss:** Equals to the difference between the at-the-money and out-of-the-money strike, minus the net credit received.\
Maximum loss occurs if the underlying is below the out-of-the-money put's strike price or above the out-of-the-money call's strike price at expiration.

**Breakeven Price:** \
• On the down side, out-of-the-money Put strike minus the net credit received.\
• On the up side, out-of-the-money Call strike plus the net credit received.

**Theta:** Passage of Time -> Positive Effect\
The net effect of time decay is positive.&#x20;

**Volatility:** \
If Volatility decreases -> Positive Effect.\
If Volatility increases -> Negative Effect. \
\
Short Iron Butterflies are Vega negative, meaning that if volatility increases, the position loses value.

## Long Iron Butterfly

{% hint style="info" %}
A Long Iron Butterfly is a combination of buying an at-the-money Call and Put option, and selling an out-of-the-money Call and Put option (at the wings).
{% endhint %}

**Payoff Diagram:**

<figure><img src="/files/MKqYzdQskOAMEf0uFZlB" alt=""><figcaption></figcaption></figure>

**Direction Assumption:** Bi-directional

**Maximum Profit:** Equals to the difference between the at-the-money and out-of-the-money strike, minus the net cost.\
Maximum profit occurs if the underlying is below the out-of-the-money put's strike price or above the out-of-the-money call's strike price at expiration.

**Maximum Loss:** Limited to net cost, which is calculated by credit received from selling the out-of-the-money Call and Put, minus the cost of buying the at-of-the-money Call and Put.

**Breakeven Price:** \
• On the down side, out-of-the-money Put strike plus the net cost paid.\
• On the up side, out-of-the-money Call strike minus the net cost paid.

**Theta:** Passage of Time -> Negative Effect\
The net effect of time decay is negative.&#x20;

**Volatility:** \
If Volatility decreases -> Negative Effect.\
If Volatility increases -> Positive Effect. \
\
Long Iron Butterflies are Vega positive, meaning that if volatility increases, the position gain value.