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Neutral · Defined risk

Iron
Butterfly

A high-credit, pin-the-strike income trade with a sharp profit peak at the centre and capped risk on both wings. Here's how to build it and the exact numbers.

What it is

An iron butterfly sells an ATM call and an ATM put at the same centre strike, then buys an OTM call and an OTM put as protective wings. You collect a fat net credit and want price to pin the centre strike at expiry. It's a neutral income trade — like an iron condor with both short strikes squeezed together.

Key facts

  • Market view: neutral; expecting price to sit near one level with falling volatility.
  • Construction (4 legs): Sell ATM call + Sell ATM put; Buy OTM call + Buy OTM put (wings).
  • Net result: credit — a larger credit than an iron condor.
  • Max profit: the net credit, if price pins the centre strike at expiry.
  • Max loss: wing width − net credit, if price moves beyond either wing.
  • Breakevens (two): centre strike ± net credit.
P&L Underlying price → Centre strike Max profit = net credit Max loss Max loss
Iron butterfly — a sharp tent peak at the centre strike; losses are capped by the wings on both sides.

How to construct it

  • Sell the ATM call and ATM put at the same centre strike for a large credit.
  • Buy an OTM call and an OTM put equidistant from the centre as wings.
  • Keep both wings the same width so risk is symmetric.

Worked NIFTY example

Suppose NIFTY is near 22,500. Sell the 22,500 call and 22,500 put, buy the 22,700 call and 22,300 put, for a net credit of 120 (illustrative; wings are 200 wide):

  • Max profit: 120 (×75 lot = ₹9,000), if NIFTY pins 22,500.
  • Max loss: 200 − 120 = 80 (×75 = ₹6,000), beyond 22,300 or 22,700.
  • Breakevens: 22,500 − 120 = 22,380 and 22,500 + 120 = 22,620.

When to use it

  • You expect the market to stall near a level into expiry.
  • Implied volatility is high and likely to fall — you're a net premium seller.
  • You want a bigger credit than an iron condor and accept the narrower profit zone.

Risks to respect

  • The profit zone is narrow — any decent move erodes the credit fast.
  • A gap or trend past a wing hits the max loss quickly.
  • Four legs mean more charges; manage early rather than holding to the last day.

Build an iron butterfly live

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Related strategies

  • Iron Condor — wider profit zone, smaller credit.
  • Short Straddle — the uncapped core of this trade.
  • Theta — the time-decay Greek that pays this trade.