Short Iron Butterfly
Description
The Short Iron Butterfly is another volatility strategy and is the opposite of a Long
Iron Butterfly, which is a rangebound strategy.
Short iron butterflies arent particularly popular because they produce a net debit
and offer very small returns compared to straddles and strangles with only slightly
less risk.
The Short Iron Butterfly involves putting together a Bear Put Spread and a Bull
Call Spread. The higher strike put shares the same strike as the lower strike call to
create the Short Butterfly shape. The resulting position is profitable in the event of a
big move by the stock. The problem is that the reward is seriously capped and is typ-
ically dwarfed by the potential risk if the stock fails to move.
P/L Profile
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