Strategy
Iron butterfly
A short straddle with protective wings: sell the at-the-money call and put, buy a call above and a put below.
View: neutralCredit (you receive)Limited risk
How it is built
- Sell 1 lot each of the at-the-money call and put.
- Buy 1 lot of a higher call and 1 lot of a lower put as protection.
A structure for a view that the index will end very close to its current level, with losses capped by the wings.
Risks
- Profit is highest only if the index ends exactly at the middle strike; it shrinks quickly either side.
- Losses are capped, but reached with moderate moves.
- Selling options needs margin set by the exchange (SPAN plus exposure margin), usually far more than the premium received.
How the Greeks behave
- Delta
- Close to zero at the start
- Theta
- Strongly positive
- Vega
- Strongly negative
Worked example on Nifty 50
| Leg | Premium per unit | Cash flow |
|---|---|---|
| Buy 1 lot 24,250 PE | ₹10.20 | −₹663 |
| Sell 1 lot 25,000 PE | ₹178.07 | +₹11,575 |
| Sell 1 lot 25,000 CE | ₹209.21 | +₹13,599 |
| Buy 1 lot 25,750 CE | ₹15.76 | −₹1,025 |
Net received
₹23,486
Max profit
₹23,486
Max loss
₹25,264
Break-evens
24,639 / 25,361
Profit and loss at expiry
For the whole position, before charges.
Premiums are theoretical Black–Scholes values from round, illustrative inputs, not market prices. Charges and margin are not included.Price a single leg with your own numbers.
Iron butterfly on other indices
Frequently asked questions
How is an iron butterfly different from an iron condor?
The butterfly sells the same at-the-money strike for the call and the put, so it collects more premium but profits in a narrower range.
What is the maximum loss?
The distance to a bought wing minus the net premium, times the lot size.
Why is it called a butterfly?
The payoff chart has a peak in the middle and flat wings on both sides.