Iron Butterfly
Iron butterfly: sell put(K_atm) + sell call(K_atm) + buy put(K_low) + buy call(K_high). Combines a short straddle (unlimited risk) with long OTM wings to cap losses. Net credit = collected ATM premiums − cost of wings. Maximum profit = net credit (if stock expires at ATM). Maximum loss = wing width − net credit. Breakevens: K_atm ± net credit. The iron butterfly is a more aggressive version of the iron condor — wider profit zone (all same middle strike) but requires the stock to expire near the strike.
Related Terms
Iron Condor
Sell an OTM put spread and an OTM call spread simultaneously — profits if the underlying stays in a wide range.
Straddle
Buying a call and a put at the same strike — profits from a large move in either direction.
Implied Volatility (IV)
The volatility that, when input into the BSM model, makes the model price equal to the market price of an option.