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Seasoned VeteransNeutral
Iron Butterfly
Overview
A combination of a short straddle with protective wings. You sell an ATM call and put (collecting premium) and buy an OTM call and put for protection. Maximum profit if stock expires exactly at the short strike.
Max Profit
Net premium received
Max Loss
Width of either wing - Net premium received
Breakeven
ATM strike ± Net premium received
Structure
Short 1 ATM Call + Short 1 ATM Put + Long 1 OTM Call + Long 1 OTM Put
Risk Profile
Limited profit (net premium). Limited, defined risk. Highest profit at center strike.
When to Use
When you expect the stock to stay very close to the current price. When IV is high (larger premium collected). A defined-risk version of the short straddle.