Long Iron Butterfly
Description
The Long Iron Butterfly is an intermediate strategy that can be profitable for stocks
that are rangebound. It is, in fact, the combination of a Bull Put Spread and a Bear
Call Spread. The higher strike put shares the same strike as the lower strike call to
create the butterfly shape. The combination of two income strategies also makes this
an income strategy. Often, traders will leg into the Long Iron Butterfly, first trading
a Bull Put Spread just below support and then as the stock rebounds off resistance
adding a Bear Call Spread, thereby creating the Long Iron Butterfly.
Ideally the stock will remain between the lower and higher strikes, with the max-
imum profit occurring if the options expire when the stock is priced at the central
strike price. In this ideal scenario, effectively all the options expire worthless, and
you just keep the combined net credit. The combined net credit serves to widen the
area of your breakevens in other words, the Bull Put element helps the Bear Call
element, and vice versa.
P/L Profile
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