Long Iron Butterfly

Overview

Pattern evolution:

When to use: When the market is either below A or above C and the position is underpriced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent breakout move in either direction.

Profit characteristics: Maximum profit equals (B – A) less the net debit to create the position. Occurs when market, at expiration, is below A or above C.

Loss characteristics: Maximum loss occurs if market is at B at expiration. Amount of that loss is net debit to create the position. Break-evens are at B + and – initial debit.

Decay characteristics: Decay negligible until final month, during which distinctive pattern of butterfly forms. Maximum loss is at B. If you are away from (A-C) range entering last month, you may wish to hold the position.

CATEGORY: Precision
Long straddle B, short strangle at AC
Short put A, long put B, long call B, short call C

Additional Futures & Options Strategies

[sibling-pages exclude_current_page=”1″]

Contents Courtesy of CME Group.