Reverse Iron Butterfly at a glance
| Construction | Sell 1 put three strikes below the current price, buy 1 at the money put, buy 1 at the money call, and sell 1 call three strikes above, all in the front month expiration, for a net debit. |
|---|---|
| Outlook | Big move either way |
| Volatility view | Wants rising IV |
| Max profit | (Wing width minus net debit) × 100, where wing width is the distance between the middle strike and either short strike. |
| Max loss | Net debit × 100. |
| Breakeven | Lower breakeven = middle strike minus net debit. |
| Experience level | Advanced |
| Also called | Long iron butterfly |
How a reverse iron butterfly works
The reverse iron butterfly starts from a long straddle and sells a far out of the money strangle to finance part of it. You keep the straddle's ability to profit from a move in either direction, but you give up everything beyond the short strikes. In exchange, the debit and the daily time decay are smaller than for a plain straddle. It can also be seen as a bull call spread and a bear put spread bought together around the same middle strike.
At expiration, the payoff is a valley with flat shoulders. At the middle strike, all four options expire worthless and you lose the full debit. Moving away from the middle, the long call or long put gains one dollar per share for each dollar of movement until the stock reaches the short strike on that side, where profit caps at the wing width minus the debit. Beyond the outer strikes the payoff stays flat no matter how far the stock travels.
Before expiration, the position is long gamma and long vega around the middle strike, so a fast move or a jump in implied volatility helps and quiet days hurt. Because the short wings offset part of the long options' vega and theta, the trade is less sensitive to volatility in both directions than a straddle. Once the stock moves near a short strike, the position behaves like a vertical spread close to its maximum value, and further movement adds little.
Reverse Iron Butterfly example with real numbers
With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would sell 1 92.5 put (32 days) at $0.84, buy 1 100 put (32 days) at $3.39, buy 1 100 call (32 days) at $3.73, sell 1 107.5 call (32 days) at $1.17. That is a net debit of $511. At expiration a maximum profit of $239 and a maximum loss of $511, with breakevens at $94.89 and $105.11. The lognormal chance of profit is 57%.
These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the reverse iron butterfly calculator above to run the same math on real market prices.
When to use a reverse iron butterfly
- You expect a sizable move, such as a reaction to earnings, but think it will stay within a definable range.
- You want long volatility exposure for less money than a straddle costs.
- Implied volatility is moderate, so the at the money options are not overpriced relative to the expected move.
Max profit, max loss and breakeven
Maximum profit
(Wing width minus net debit) × 100, where wing width is the distance between the middle strike and either short strike. It is earned if the stock closes at or beyond either short strike at expiration.
Maximum loss
Net debit × 100. It occurs if the stock closes exactly at the middle strike at expiration.
Breakeven
Lower breakeven = middle strike minus net debit. Upper breakeven = middle strike plus net debit.
Reverse Iron Butterfly Greeks
- Delta: Close to zero at entry, then positive on a rise and negative on a fall, so the position follows the move until a short strike is reached.
- Gamma: Positive near the middle strike and negative near the short wings, where gains flatten out.
- Theta: Negative while the stock stays near the middle strike, the cost of holding the long straddle.
- Vega: Positive near the center, but smaller than a long straddle's because the short wings offset part of it.
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
The short options in a reverse iron butterfly are the out of the money wings, so early assignment only becomes a concern after the stock has moved through one of them, which is also where the trade reaches its maximum profit. If the stock rallies above the upper call strike and that call is assigned early, for example the day before an ex dividend date, you become short 100 shares. Your long at the money call is now deep in the money and fully covers the obligation.
You can respond by exercising the long call to deliver the shares, which locks in roughly the maximum profit minus any time value the long call still held, or by buying shares in the market and selling the long call separately. The same logic applies on the downside if the short put is assigned and leaves you long shares that your long put covers. At expiration, pin risk sits at the outer strikes, where your long option is exercised automatically while assignment on the short option is uncertain.
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
- Profits from a large move either way with a known maximum loss.
- Costs less than a long straddle and decays more slowly.
- The short wings are out of the money, so early assignment only arises when the trade is already winning.
Cons
- Profit is capped at the outer strikes, so a very large move earns no more than a moderate one.
- Loses the full debit if the stock sits at the middle strike at expiration.
- Time decay works against the position every quiet day.
- Four legs add commissions and slippage.
How to manage a reverse iron butterfly
- Close the trade once the stock reaches a short strike, since little additional profit is available beyond it.
- Exit or reduce size if the expected catalyst passes without a move, before decay accumulates.
- If a short wing is assigned early, flatten the shares with the matching long option or in the market, then close the rest.
- Compare wider and narrower wings in the calculator to balance the cost against the profit cap.
Reverse Iron Butterfly FAQ
What is a reverse iron butterfly?
A reverse iron butterfly is a debit strategy that buys an at the money straddle and sells an out of the money strangle to reduce the cost. It profits from a large move in either direction, with both the maximum profit and maximum loss defined at entry.
Reverse iron butterfly vs long straddle: how do they compare?
A reverse iron butterfly costs less and loses less to time decay than a long straddle, but its profit is capped at the short strikes. A long straddle keeps unlimited upside and larger downside profit potential at a higher price. The better fit depends on how large a move you expect.
What is the max profit on a reverse iron butterfly?
The maximum profit on a reverse iron butterfly is the wing width minus the net debit, times 100. You earn it when the stock closes at or beyond either short strike at expiration.
Can a reverse iron butterfly be assigned early?
Yes, but only on the short wings, and only once the stock moves through one of them. At that point the matching long option is deep in the money and covers the assignment, so your risk does not increase. The practical effect is a temporary stock position you will want to close.
Related strategies
Iron Butterfly
An iron butterfly is a neutral, defined risk credit strategy that sells an at the money put and call and buys an out of the money put and call as protective wings.
Long Straddle
A long straddle is the purchase of a call and a put at the same strike and expiration, usually at the money.
Reverse Iron Condor
A reverse iron condor is a defined risk long volatility strategy that buys an out of the money put spread and an out of the money call spread on the same stock and expiration.
Short Call Butterfly
A short call butterfly is a limited risk volatility strategy that sells one lower strike call, buys two middle strike calls and sells one higher strike call for a net credit.
Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.