Short Iron Butterfly

Overview

Pattern evolution:

When to use: Enter when the Short Iron Butterfly’s net credit is 80 percent or more of C – A, and you anticipate a prolonged period of relative price stability where the underlying will be near the mid-point of the C – A range close to expiration. This is a rule of thumb; check theoretical values.

Profit characteristics: Maximum profit occurs if a market is at B at expiration. Profit would be equal to short straddle premium minus long strangle premium. This profit develops, almost totally, in the last month.

Loss characteristics: Maximum loss, in either direction, net premium collected minus (B-A). This is a very conservative trade, break-evens are at B + and – net premium collected.

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

CATEGORY:Precision
Short 1 call and 1 put at B, buy 1 put at A, buy 1 call at C
or sell straddle at strike price B and buy strangle at AC
for protection

Additional Futures & Options Strategies

• How to Use This Guide
• Long Futures
• Long Synthetic Futures
• Short Synthetic Futures
• Long Risk Reversal
• Short Risk Reversal
• Long Call
• Short Call
• Long Put
• Short Put
• Bull Spread
• Bear Spread
• Long Butterfly
• Short Butterfly
• Long Iron Butterfly
• Long Straddle
• Short Straddle
• Long Strangle
• Short Strangle
• Ratio Call Spread
• Ratio Put Spread
• Ratio Call Backspread
• Ratio Put Backspread
• Box or Conversion

Contents Courtesy of CME Group.