Iron Butterfly Calculator: Profit, Risk, Breakevens

Iron Butterfly at a glance

Construction	Buy 1 put three strikes below the current price, sell 1 at the money put, sell 1 at the money call, and buy 1 call three strikes above, all in the front month expiration, for a net credit.
Outlook	Neutral
Volatility view	Wants falling IV
Max profit	Net credit × 100.
Max loss	(Wing width minus net credit) × 100, where wing width is the short strike minus the long put strike, which equals the long call strike minus the short strike.
Breakeven	Lower breakeven = short strike minus net credit.
Experience level	Intermediate
Also called	Short iron butterfly, Iron fly

How a iron butterfly works

An iron butterfly is a short straddle with insurance. The at the money put and call generate a large credit, and the two long wings, placed an equal distance away, cap the loss in both directions. You can also view it as a bull put spread and a bear call spread that share the same short strike. Because the wings define the risk, the capital at stake is the wing width minus the credit rather than the open ended exposure of a naked straddle.

At expiration, the payoff is a sharp peak. If the stock finishes exactly at the short strike, both short options expire worthless and you keep the whole credit. Every dollar away from the short strike costs one dollar per share until the stock reaches a long wing, where the loss stops growing. The profitable zone runs from the short strike minus the credit to the short strike plus the credit, which is narrow compared with an iron condor.

Before expiration, the iron fly collects heavy time decay because at the money options hold the most extrinsic value, and it profits from a drop in implied volatility. Negative gamma is concentrated at the short strike, so even modest moves change the delta quickly, especially in the final weeks. For that reason traders often aim to capture a portion of the credit early rather than hold for an exact pin, since finishing precisely at one strike is unlikely.

Iron Butterfly example with real numbers

Iron Butterfly payoff diagram: profit and loss at expiration (solid) and today (dashed) for the example below. Yellow dots mark breakevens.

With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would buy 1 92.5 put (32 days) at $0.84, sell 1 100 put (32 days) at $3.39, sell 1 100 call (32 days) at $3.73, buy 1 107.5 call (32 days) at $1.17. That is a net credit of $511. At expiration a maximum profit of $511 and a maximum loss of $239, with breakevens at $94.89 and $105.11. The lognormal chance of profit is 43%.

These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the iron butterfly calculator above to run the same math on real market prices.

When to use a iron butterfly

You expect the stock to stay very close to its current price through expiration.
Implied volatility is high, for example before an earnings release, and you expect it to fall.
You want the larger credit of a short straddle but need a defined maximum loss.
You prefer a higher credit and a narrower profit zone than an iron condor offers.

Max profit, max loss and breakeven

Maximum profit

Net credit × 100. It is earned only if the stock closes exactly at the short strike at expiration; any other close keeps part of it or produces a loss.

Maximum loss

(Wing width minus net credit) × 100, where wing width is the short strike minus the long put strike, which equals the long call strike minus the short strike. It occurs if the stock closes at or beyond either long strike.

Breakeven

Lower breakeven = short strike minus net credit. Upper breakeven = short strike plus net credit.

Iron Butterfly Greeks

Delta: Near zero at entry. It turns negative as the stock rises and positive as it falls, leaning against any move.
Gamma: Strongly negative at the short strike, and increasingly so near expiration. This is the main risk of the trade.
Theta: Strongly positive, since the short at the money options carry the most time value.
Vega: Negative. A drop in implied volatility shrinks the short straddle and helps the position.

See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.

Early exercise and assignment risk

With both short options at the same strike, one of them will be in the money as soon as the stock moves, so early assignment is possible throughout the trade. If the stock rises and the short call's time value falls below an upcoming dividend, assignment becomes a real risk the day before the ex dividend date, leaving you short 100 shares with the long call wing, the short put and the long put still open. A deep in the money short put can likewise be assigned after a sharp decline, leaving you long 100 shares.

Assignment does not change the defined risk, because the long wing on that side still caps the loss, but it changes the position's makeup and buying power. Pin risk is the bigger expiration issue: if the stock closes near the short strike, you cannot tell whether the call, the put or neither will be assigned, and you may open the next session with an unhedged 100 share position. Buying back the short straddle before the close, even for a small amount, removes that uncertainty.

The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.

Pros and cons

Pros

Large credit from selling at the money options, with the maximum loss capped by the wings.
Strong time decay and a benefit from falling implied volatility.
Requires far less capital than a naked short straddle.
Can be adjusted into a broken wing butterfly or an iron condor as the stock moves.

Cons

Narrow profit zone around a single strike.
Maximum profit requires an exact close at the short strike.
High negative gamma makes the position sensitive to small moves near expiration.
Pin and early assignment risk are concentrated at the short strike.

How to manage a iron butterfly

Set a profit target as a portion of the credit and close when it is reached rather than chasing the full credit.
If the stock moves to one side, roll the untested spread toward the price, or roll the whole fly to recenter it.
Close before expiration day if the stock is near the short strike to avoid pin risk.
When the short call is in the money ahead of an ex dividend date, close or roll it if its time value is below the dividend.

Iron Butterfly FAQ

What is an iron butterfly in options?

An iron butterfly is a four leg credit spread that sells an at the money straddle and buys an out of the money strangle around it for protection. It profits when the stock stays near the short strike and implied volatility falls. Both maximum profit and maximum loss are fixed at entry.

Iron butterfly vs iron condor: what is the difference?

An iron butterfly sells both short options at the same at the money strike, while an iron condor sells them at separate out of the money strikes. The iron fly collects a larger credit but has a narrower profit zone. The iron condor collects less but tolerates more movement.

What is the max loss on an iron butterfly?

The maximum loss on an iron butterfly is the wing width minus the net credit, times 100. It occurs if the stock closes at or beyond either long wing at expiration. Wider wings raise the maximum loss but also increase the credit.

What happens to an iron butterfly at expiration?

At expiration, each leg settles based on where the stock closes, and any in the money option is exercised or assigned automatically. If the stock is between a wing and the short strike, only the short option on that side is in the money, so you will be assigned 100 shares unless you close first. If it is beyond a wing, the short and long options on that side offset.

Short Straddle

A short straddle is the sale of a call and a put at the same strike and expiration, usually at the money.

NeutralAdvanced

Iron Condor

An iron condor is a neutral, defined risk credit strategy that sells an out of the money put spread and an out of the money call spread on the same stock and expiration.

NeutralIntermediate

Long Call Butterfly

A long call butterfly is a neutral, limited risk strategy built from three call strikes: buy one lower strike call, sell two middle strike calls and buy one higher strike call.