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Long iron butterfly
A long iron butterfly is a four-legged, defined-risk, volatility-focused option strategy. You buy an at-the-money call and put and sell out-of-the-money wings, paying a net debit. The chart below shows a long iron butterfly with long call and put strike 100 at $5, short call strike 105 at $2, short put strike 95 at $2, and the profit/loss diagram.
Greeks and this strategy
| Greek | How it behaves |
|---|---|
| Delta | Near zero at the center strike. Directional exposure emerges if price moves toward the wings. |
| Theta | Mixed. The long center straddle decays while short wings benefit from time; net theta depends on strikes and days left. |
| Gamma | Mixed across four legs; highest sensitivity near the center strike at expiration. |
| Vega | Typically positive. Long ATM straddle vega dominates; benefits from volatility expansion. |
Overview of long iron butterfly
A long iron butterfly combines a long straddle at the center strike with short protective wings at higher and lower strikes. All four legs share the same expiration date. Maximum loss is limited to the net debit paid. Maximum profit occurs if the stock closes at the center strike at expiration. Each contract represents 100 shares of the underlying (relevant for the US market).
Market outlook for long iron butterfly
Traders open a long iron butterfly when they expect the underlying to pin near the center strike and implied volatility to rise before expiration. It costs less than a long straddle because the short wings offset part of the premium. The trade sacrifices unlimited upside and downside beyond the wings for a lower entry cost.
How to open a long iron butterfly
Open the position by buying a call and put at the center strike and simultaneously selling a higher-strike call and a lower-strike put. All four orders are typically placed as a single complex order. The net debit paid equals the straddle cost minus the credit from the wings.
Profit/loss diagram for a long iron butterfly
Maximum loss equals the net debit paid and occurs if the stock closes at or beyond either wing at expiration. Maximum profit equals the wing width minus the net debit and occurs at the center strike. For example, buying a $100 straddle for $10.00 and selling $95/$105 wings for $4.00 creates a $6.00 debit on a $5.00-wide structure. Maximum profit is $500 per contract if the stock closes at $100.
How to enter a long iron butterfly
Submit an iron butterfly order to your broker, specifying all four strikes, expiration, and a limit price for the net debit. The order is filled when the market accepts your limit debit or better. Opening the position debits your account for the net premium plus commissions.
How to exit a long iron butterfly
Close the position before expiration by reversing all four legs as a single complex order. If the position value exceeds the entry debit, you realize a profit. At expiration, the position may be partially or fully assigned depending on where the stock closes relative to the strikes.
The impact of time decay on a long iron butterfly
Time decay affects the long center straddle and short wings differently. Near the center strike, the long straddle loses extrinsic value while the short wings also decay. The net effect depends on strike selection and how close the stock stays to the center strike through expiration.