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What is a long iron butterfly?

A long iron butterfly is a complex options trading strategy that involves four options contracts with the same expiration date but different strike prices. It’s a neutral strategy that profits from a stock’s price staying within a certain range. The four options involved are:

  • Buy 1 Out-of-the-Money (OTM) Call
  • Sell 2 At-the-Money (ATM) Calls
  • Sell 2 At-the-Money (ATM) Puts
  • Buy 1Out-of-the-Money (OTM) Put

The intent of the long iron butterfly is to generate profit from the underlying asset’s price remaining within a specified range upon the options’ expiration. This range is established by the ATM strike prices of the sold call and put options. The maximum profit is achieved if the asset’s price settles precisely at the ATM strike prices at expiration, as both the put and call options would expire worthless.

While this strategy offers limited risk due to the purchased OTM options, potential losses may arise if the asset’s price significantly surpasses the boundaries defined by the strike prices. Traders must attentively monitor market conditions and adjust their positions if necessary to mitigate potential risks associated with unforeseen market movements.

To find out what is a short iron butterfly click here What is a short iron butterfly?