Iron Butterfly

An iron butterfly is a four-leg options strategy consisting of selling an at-the-money call and put (a short straddle) while simultaneously buying an out-of-the-money call and put (the wings) for protection. All four options share the same expiration date. The strategy collects a large credit from the short straddle, with the long wings limiting maximum loss. Maximum profit occurs when the underlying expires exactly at the middle strike price, and the trader keeps the entire credit received. Maximum loss is the width of either wing minus the credit received. The iron butterfly is essentially a narrow iron condor where the two short strikes are the same. It is popular among income-focused traders who expect the underlying to stay at or very near a specific price level with low volatility.