Iron Butterfly

An Iron Butterfly is a combination of at-the-money Call and Put option, and also a out-of-the-money Call and Put option (at the wings).

Short Iron Butterfly

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).

Payoff Diagram:

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.

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

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).

Payoff Diagram:

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.

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.