PREMIUMLong Iron Butterfly
Overview:
Butterfly spreads are a popular strategy due to the limited risk. The strategy combines a long strangle and a short strangle with the same underlying and exercise date. The strategy is employed by purchasing a deep out-of-the-money put option, selling an at-the-money put option, selling an at-the-money call option and purchasing a deep out-of-the-money call option. All the options will expire in the same month.
Main Uses:
- Investors who think the underlying stock won’t move too much between now and expiration will invest in this strategy. The out-of-the-money call options and put options act as protection in case the stock price moves either upwards or downwards.
- Investors use this strategy for additional leverage.
Profit / Loss Graph:
The below graph is a profit / loss graph of a long iron butterfly using the OptionsHouse P&L calculator. The current stock price is at $113.78. A deep-out-of-the money put option was purchased with a strike price of $109. A deep-out-of-the-money call option was purchased with a strike price of $119. An at-the-money call option was sold with a strike price of $114 and finally, an at-the-money put option was sold with a strike price of $114. The two break-even prices are $111.99 and $116.01. The investor will make money as long as the stock price stays within those two break-even prices.
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