← Strategy LabLesson 30 · 4:44
Iron butterfly
Summary
The iron butterfly sells a put and a call at the same strike right at the price, and buys a cheaper put and call on either side as wings, as a bet that XYZ ends very close to where it is. In the example you collect $387 and can lose only $113, but you keep all $387 only if XYZ ends at exactly $100. You break even at $96.13 and $103.87.
Key terms
- iron butterfly
- A put and a call sold at the same strike, with a bought wing on each side, paid most if the stock ends right at that strike.
- body
- The options sold in the middle of a condor or butterfly.
- wings
- The bought options on the outside of a condor or butterfly that put a floor under the loss.
- short straddle
- Selling a call and a put at the same strike, paid if the stock sits still, with no limit to the loss on the upside.
- peak
- The single highest point of a tent-shaped last-day line, where the trade makes the most.
- assignment
- When a buyer exercises and you, as the seller of that option, must deliver.
Check yourself
Answer each question to see why the right answer is right.
1. How much does the lesson's iron butterfly collect, net?
2. Why is the most you can lose only $113?
3. XYZ ends at $103 on the last day. Is that a gain or a loss?
4. XYZ sits at $105 and the days pass with nothing else changing. What does time do to your result?
5. XYZ ends at $90 on the last day. What is your result?
Finished the video and the quiz? .