← Strategy LabLesson 32 · 4:47
Reverse iron butterfly
Summary
The reverse iron butterfly buys a put and a call at the same strike right at the price and sells a cheaper put and call on either side, to bet XYZ moves away from $100 either way. In the example it costs $387 and can make at most $113 once XYZ is past $95 or $105, while ending at exactly $100 loses all $387. You break even at $96.13 and $103.87.
Key terms
- reverse iron butterfly
- Buying a put and a call at the same strike right at the price and selling a cheaper put and call on either side, to pay a fixed amount for a bet the stock leaves that strike.
- long straddle
- Buying a call and a put at the same strike and expiry, to profit from a big move either way.
- net debit
- When a pair of trades sends cash out overall.
- V shape
- risk to reward
- How much a trade can lose compared with how much it can make, such as $387 to make $113.
Check yourself
Answer each question to see why the right answer is right.
1. Which legs make up the lesson's reverse iron butterfly?
2. Why is the most you can make only $113?
3. XYZ ends at $110 on the last day. What is your result?
4. Where does the trade break even on the last day?
5. XYZ sits at $105 and the days pass with nothing else changing. What happens to your result if you closed today?
Finished the video and the quiz? .