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Iron Butterfly

You think ETH settles near 2,450 on Friday expiry. Not 2,300, not 2,600. You want to sell the straddle at that strike, but an undefined-risk short straddle on a 24/7 market with liquidation cascades is a bad idea. An iron butterfly gives you the same pin bet with wings to cap the damage.

You sell the ATM call and put at the same strike. You buy protective options on both sides. You collect more premium than an iron condor because both short legs are ATM, but the profit zone is a knife edge instead of a wide box.

💡

An iron butterfly is a condor that stopped pretending it doesn't have a pin target.

What You Do​

The SetupYou receive premium
Buy1 OTM put (lower wing)
Sell1 ATM put
Sell1 ATM call (same strike as put)
Buy1 OTM call (upper wing)
Max Profit
Net credit
Max Loss
Wing width - credit
Upper BE
ATM strike + credit
Lower BE
ATM strike - credit

How the P&L Works​

The payoff looks like a tent. Sharp peak at the center, symmetrical decline on both sides.

  1. At the ATM strike. Perfect outcome. Both short options expire worthless (or at-the-money with no intrinsic). You keep the full credit.
  2. Between breakevens. Partial profit. Every dollar the underlying moves from center costs you a dollar off the credit.
  3. Beyond the wings. Max loss. Capped by the long options.

Worked Example​

BTC at 96,800. You center the iron butterfly at 97k with 5k wings.

Sell 97k call + 97k put for 7,400 total. Buy 92k put + 102k call for 2,600 total. Net credit: 4,800. Wing width: 5k.

BTC at Expiry
P&L
Result
$88,000
-$200
Max loss (put side)
$92,000
-$200
Max loss (at wing)
$92,200
$0
Lower breakeven
$94,500
+$2,300
Partial profit
$97,000
+$4,800
Max profit (pin!)
$99,500
+$2,300
Partial profit
$101,800
$0
Upper breakeven
$102,000
-$200
Max loss (at wing)

Max loss is only 200, the wing width (5k) minus the credit (4,800). That makes this butterfly extremely efficient when the premium is high relative to the width. The catch: BTC needs to be within 4,800 of 97k at expiry for any profit at all.

Explore the Payoff​

Spot at Expiry$100k
$70k$130k
Net Credit$8k
$3k$10k
BE $92kBE $108k$0+$8k-$2k$70kK1 $90kK2 $100kK3 $110k$130kSpot Price at ExpiryP&L
Settlement
$100k
P&L
+8.0k
Max Loss
-$2k
Max Gain
+$8k

When to Use​

  • You have a specific pin target. Max pain, a round number, or a level that's acted as a magnet all week
  • You want more premium than an iron condor and you're willing to accept a narrower range
  • IV is elevated, making the ATM straddle juicy enough that your wings are nearly free
  • You're willing to actively manage. Iron butterflies need more attention than condors because the profit zone is tighter

The iron butterfly shines at weekly expiry on Friday mornings when BTC is pinned near a round number and gamma is doing its thing. Institutions with large open interest at a strike create a gravitational pull. The butterfly is how you monetize that pin.

Common Mistakes
The mistakeTreating it like a condor and forgetting the profit zone is a knife edge.
The realityAn iron condor has a wide flat profit zone. An iron butterfly's max profit is a single point. If BTC moves $3k from center, you might already be at breakeven. Set profit targets earlier -- 25-30% of max credit, not 50%.
The mistakeIgnoring the breakeven width relative to typical daily ranges.
The realityIf BTC's average daily range is $3k and your breakevens are $4.5k apart, one bad day can take you from max profit to breakeven. Size the wings relative to expected move, not just what looks good on the payoff chart.
The mistakeChoosing the center strike based on where BTC is now instead of where it'll be at expiry.
The realityCheck max pain, open interest concentration, and gamma exposure levels. If max pain is at $95k and BTC is at $97k, centering at $95k might be smarter than centering at current spot.

Greeks at a Glance​

Greek
Sign
Plain English
Delta
~0
Neutral at entry since both short legs are ATM.
Gamma
--
Maximum negative gamma. ATM shorts have the highest gamma of any strike. This is the most gamma-sensitive structure you can build with defined risk.
Theta
++
Maximum time decay income. ATM options have the most theta, and you're short two of them.
Vega
--
Very sensitive to IV changes. If IV spikes 10 points after you put this on, your P&L takes a hit even if spot hasn't moved.

The iron butterfly is the most theta-positive defined-risk structure. It's also the most gamma-negative. You're collecting maximum rent and paying maximum earthquake insurance. The trade works when the earthquake doesn't come.

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