OptionsAcademy

An iron butterfly is a neutral strategy that combines a bear call spread and a bull put spread. You're selling premium on both sides.

Structure

Tesla is $200:

• Sell $190 put, Buy $180 put
• Sell $210 call, Buy $220 call
• Collect net credit: $3 per share ($300 total)

Profit if Tesla stays between $190-$210 at expiration. Max profit is the credit collected ($300).

Risk Profile

Maximum Profit: The credit collected ($300)

Maximum Loss: The width of one spread minus the credit

In this example: $10 spread width - $3 credit = $7 max loss per share ($700 total)

Profitable Zone: $193-$207 (credit width from the short strikes)

Why Use It

• High probability (wide profit zone if wings are far enough)
• Limited risk (you know max loss upfront)
• Collects premium from time decay and volatility contraction
• Defined risk/reward

Challenges

• Wide stock range needs to be maintained
• Assignment risk if ITM at expiration
• Two credit spreads to manage

Adjustments

• Close early when hitting 50% of max profit
• Roll tested side out and up/down
• Let tested side as a strangle

Related: Iron Condor, Bear Call Spread, Bull Put Spread