Capture maximum premium from range-bound markets with tight, risk-defined strategies.
Iron butterflies combine elements of credit spreads and butterfly spreads to create a strategy that generates income when price lands at a targeted level.
It is popular for traders who believe the underlying will stay close to a certain strike through expiry and want a payoff with well-defined boundaries.
What Is an Iron Butterfly
An iron butterfly uses both calls and puts at three strikes:
- Sell 1 call and sell 1 put at the middle strike (the “body”)
- Buy 1 call at a higher strike
- Buy 1 put at a lower strike
- All legs share the same expiry
This forms a “body” at the center, with “wings” on each side to cap risk.
Example: Iron Butterfly
Suppose ETH is trading at $3,000.
- Sell 1 call and 1 put at $3,000
- Buy 1 call at $3,100
- Buy 1 put at $2,900
- All with the same expiry
Setup:
- You receive a net credit
- Maximum profit occurs if ETH closes at $3,000 at expiry
- Maximum loss is capped at the difference between body and wing strikes minus net premium
Iron Butterfly Payout
- Maximum gain is the net premium collected if price lands at the body strike
- Maximum loss occurs if price moves beyond either wing, but risk is always limited
- Break-even points are body strike plus or minus the difference between the net premium and each wing
Why Use Iron Butterflies
- Collect premium with strictly defined risk
- Target a specific price level (“pinning”)
- Benefit in range-bound, low-volatility, or post-event scenarios
- Efficient use of capital
Iron butterflies are especially powerful when implied volatility is high before expiry but expected to collapse.
On Derive
- Construct iron butterflies by combining two vertical spreads (call and put)
- Margin and Greeks are displayed live for the combined position
- Use subaccounts to track pinning trades or premium strategies separately
- All legs and risk limits are transparent before execution
Your Action Today
- Pick a strike near current price on BTC or ETH
- Build an iron butterfly centered at that strike
- Observe net premium, max gain, and max loss
- Watch how the trade performs as price approaches or moves away from the pin
Tomorrow, we move to dynamic position management, including how to adjust, roll, or exit spreads as markets evolve.
Coming tomorrow:
Day 29 – Adjusting and Rolling Spreads: Staying in the Game
Hasta manana
Cpt
CptRandlelwa
