Options Trading Strategies: Long Iron Butterfly
A long iron butterfly spread is a four legged and three strikes strategy, created by selling one Out of The Money put, buying one At The Money put, buying one At The Money call, and selling one Out of The Money call. All calls are with the same expiration date and the two short strikes are equidistant to the middle strike.
Long iron butterfly is a variation of a long iron condor, and the opposite to short iron butterfly strategy.
You can look at a long iron butterfly as a combination of a bear put spread and a bull call spread.
When to use this strategy?
You are neutral on the market movement, and bullish on the volatility, so you are expecting a BTC/ETH price movement outside the range of the highest and lowest strike price, and want to earn a profit if the BTC/ETH makes a drastic move in either direction.
Below is a Profit and Loss chart example of a long iron butterfly options strategy:
Pros:
Maximum loss is capped.
Cons:
The higher profit potential comes with a wider range between the strikes, which widens the spread lowering your probability for profit. The amount of the potential loss is bigger than the amount of the potential profit.
Example:
In this example, BTC is trading at 37,156.9 USD and you expect its price to drastically move in either direction. You have sold an OTM put with a strike price of 35,000.00 USD, bought ATM put and ATM call both with a strike price of 37,000.00 USD, and sold an OTM call with a strike price of 39,000.00 USD, all with an expiration date of February 2nd 2022.
As this is a net debit spread, and the long options costs you more than a premium from the short options you have paid a net premium of 986.42 USD, which is also you maximum loss in this combination.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the short put OTM strike price, you are getting the maximum profit which is equal to the difference between adjacent strikes minus the net premium.
If the BTC price is above the short put OTM strike price and at or below the center strike, you are in the profit as long as the BTC price is below the first break-even price.
Your maximum loss is at the center strike price.
If the BTC price is above the center strike and at or below the OTM short call strike, you are in the profit as long as the BTC price is above the second break-even price.
If the BTC price is above the OTM short call strike, this is again your maximum profit.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 35,000.00 (strike price SP OTM) | +1,013.58 (max gain) |
| 35,506.00 | +507.58 |
| 36,013.58 (break even 1) | 0 |
| 36,522.00 | -508.42 |
| 37,000.00 (LP ATM & LC ATM) | – 986.42 (max loss) |
| 37,487.00 | -499.42 |
| 37,986.42 (break even 2) | 0 |
| 38,503.00 | +516.58 |
| 39,000.00 (strike price SC OTM) | +1,013.58 (max gain) |