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Long Iron Butterfly Option Strategy

Long Iron Butterfly Option Strategy

What is Long Iron Butterfly Option Strategy?

  • Long Iron Butterfly Strategy is a Volatility strategy that offers high risk and limited reward. Long Iron Butterfly is a four leg strategy consisting of Bull Call Spread and Bull Put spread in which Long options are of the same strike price, it is also a combination of Long Straddle and Strangle.

When to Execute?

  • With Short Iron butterflies, you are looking for a big move in stock either direction. You are expecting a surge in volatility.In scenario where strike difference is not equal it is known as Modified Short Iron Butterfly.

What is the Trade?

  • Short Iron butterfly is executed buy Long Straddle i.e. (Buying ATM Call and Put) in combination with Short Strangle.

What will be maximum profit?

  • Maximum Profit is limited to net premium paid if stock expires on the wings of the strategy. The maximum profit is equal to the difference between the lowest and middle strike prices less the net credit received.

What will be maximum loss?

  • The maximum Loss is realized if the stock price is equal to the strike price of the short options (centre strike) on the expiration date i.e., equivalent to the net premium paid.

What are the advantages?

  • It is executed when stock has been range bound for a long time and is about to give a breakout/breakdown. It is idle to trade long term options as negative time decay impact will be least.

What are the disadvantages?

  • Time decay is generally harmful to the option position.

Example of Long Iron Butterfly:

  • Nifty future price is 15700. A Short Iron Butterfly can be devised as follows -1 X 16000 CE = 160 +1 X 15700 CE= 304.00 +1 X 15700 PE = 260.00 -1X 15400 PE = 155.00 Net Premium Paid or Received = Rs. (-249.00) Maximum Defined Loss at 15700. Profit is defined below or above 15450.00—15950.00