What is an Iron Butterfly?
An Iron Butterfly is a limited risk, limited reward options strategy used when you expect very little movement in the underlying index or stock — i.e., a range-bound view.
You combine a short straddle (sell ATM Call + Put) and long wings (buy OTM Call + Put). The goal? Collect high premiums and profit if the market stays close to the center strike.
Think of It Like This:
- You sell a straddle to collect the most premium.
- You hedge the extreme moves with OTM options to reduce risk.
Why Use It?
- High premium collection
- Limited loss and defined risk
- Works best in low-volatility, sideways markets
- Favorable risk-reward for passive income generation
When Should You Use an Iron Butterfly?
- You expect minimal movement in the index/stock
- You want defined risk/reward
- You want to capitalize on time decay (theta)
- Ideal when IV is high, and you expect it to drop post-entry
Example: Iron Butterfly with NIFTY (05 June 2025 Expiry)
Let’s break down a real-world Iron Butterfly example on OptionX.
Instrument: NIFTY, Expiry: 05 June 2025, Type: Call & Put Options, View: Neutral, expecting low movement around 24750
You build this strategy by:
- Selling 1 ATM Put at 24750 PE → ₹231.65
- Selling 1 ATM Call at 24750 CE → ₹174.35
- Buying 1 OTM Put at 24550 PE → ₹98.2
- Buying 1 OTM Call at 24950 CE → ₹139.45
Credit Collected: ₹406.00 | Net Premium: ₹-168.35
Why This Strike Selection?
We centered the short straddle at 24750, as that's where NIFTY is expected to hover.
- Buy 24550 PE: To protect downside
- Buy 24950 CE: To cap upside loss
- IVs are stable: Ideal for premium selling strategies
Why These Numbers Matter
Max Profit: ₹12,626.25 — if NIFTY expires at exactly 24750
Max Loss: ₹-2,373.75 — capped loss if index moves beyond wings
Breakeven Range: 24581.65 to 24868.35 — stay within for profits
Risk/Reward: 0.19 — you’re risking ₹1 to potentially earn ₹5.32
Funds Needed: ₹77,290.27 — margin + hedging cost
POP (Probability of Profit): 22% — reward is high, but only if market stays quiet
How to Place Iron Butterfly on OptionX
Step 1: Open Strategy Builder - Login to OptionX dashboard → Add “Strategy Builder” widget
Step 2: Select Iron Butterfly & Choose Strikes - Pick the center strike near ATM, then add wings on both sides.
Step 3: Click on Open Ladder and select the quantity and order type
Step 4: Execute - Click on bid or offer column to place Buy or Sell Iron butterfly strategy
