Iron Butterfly strategy

Strategy description

An Iron Butterfly involves selling a middle strike put (B) and a middle strike call (C), while buying a lower strike put (A) and a higher strike call (D), all with the same expiration. This strategy profits if the stock stays near strike B and C at expiration. The long options at A and D limit risk, while selling the put and call at the middle strikes generates a net credit.

Compared to an Iron Condor, the Iron Butterfly offers a higher potential profit but requires the stock to remain closer to the middle strike for maximum gains.
The setup
· Buy a Put, strike price A
· Sell a Put, strike price B
· Sell a Call, strike price B
· Buy a Call, strike price D
· Generally, the stock will be at strike price B/C
Who should run it
Professionals with extensive experience
When to run it
You’re anticipating minimal movement on the stock within a specific time frame.
Break-even at expiration
Strike B minus the net credit received when opening the position (lower break-even), and strike B plus the net credit received (upper break-even)
The sweet pot
You want the stock price to be at strike B at expiration, so all options expire worthless.
Maximum potential profit
Potential profit is limited to the net credit received when opening the position.
Maximum potential loss
Risk is limited to the difference between strike B and strike A (or strike D and strike B), minus the net credit received.
Margin requirement
The margin requirement is typically the maximum potential loss, which is the difference between strike B and strike A (or strike D and strike B), minus the net credit received.
As time goes by
Time decay works in your favor if the stock price is near strike B, as the sold options lose value faster than the bought options, increasing the likelihood of achieving maximum profit at expiration.
Implied volatility
A decrease in implied volatility after entering the position is beneficial, as it reduces the value of the sold options more than the bought options, increasing the likelihood of achieving maximum profit. This strategy is often used when implied volatility is high to collect a larger net credit.

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