Select Page

Iron Butterfly

Options

Sponsored Content

steemit

Visit on Steemit!

Support us on Steemit!

bitcoinlgoo

Visit on D.Tube!

Support us on D.Tube!

Curriculum Content

A butterfly spread consists of multiple options traded at 3 equidistant strike prices with a differing amount per strike price. A butterfly constructed from a mix of calls and puts is known as an “Iron Butterfly”. Any “long” Iron Butterfly position is a bet on low volatility: the underlying asset price will remain within the range until expiration. A “short” Iron Butterfly position is a bet on high volatility: the underlying asset’s price will escape that range.  Loss and profit each have a maximum potential value for all Iron Butterfly positions.

Long Iron Butterfly

Long Iron Butterfly

How To Read/Interpret Option Diagram
An out the money put is purchased at a lower strike price. A put and a call are sold at a higher strike price. A call is purchased at an even higher strike price. The underlying asset is uniform across all options. The lowest strike price put purchased and highest strike price call purchased are equidistant from the sold middle strike price options.

As long as the underlying asset price stays exactly at the two sold middle options, the maximum profit will occur at expiration or the closing of the position. If the underlying asset price falls or rises away from the central point profits will decrease. If the underlying price moves too far from the strike price of the two sold options, loss will occur until it reaches the maximum potential loss value. A long Iron butterfly has two breakeven points. The strike price of the call and put sold plus or minus the premium.

 

Short Iron Butterfly

Short Iron Butterfly

How To Read/Interpret Option Diagram
The short butterfly reverses the long butterfly’s order sequence, but maintains its setup. An out the money put is sold at a lower strike price. A put and a call are bought at a middle strike price. A call is sold at an even higher strike price. The underlying asset is uniform across all options. The lowest strike price put purchased and highest strike price call purchased are equidistant from the sold middle strike price options.

As long as the underlying asset price stays exactly at the two sold middle options, the maximum loss will occur approaching expiration or the closing of the position. If the underlying asset price falls or rises losses will decrease. If the underlying price moves too far from the strike price of the two sold options, profit will appear and increase until it reaches the maximum potential profit value at or beyond either of the two sold options.

Short butterfly breakeven points function differently than long butterfly options. The first is the strike price of the long put minus premium paid, and the second is the strike price of the long call plus premium paid.

Iron Butterflies and Assignment

For Iron Butterflies, early assignment may result in a complete dismantlement of this position. The risk of assignment from long positions is highest when the share price is above the lowest strike price purchased options and all sold options, but below the last strike price. Utilizing European style options, typically used for Indexes, will allow you to run this trade without worrying about assignment. Index options usually move less before expiration than equity options.

Did we help you? Vote with a Crypto-Donation!
steemit

Visit on Steemit!

Support us on Steemit!

bitcoinlgoo

Donate Bitcoin

141FSmuHkMSZVsQQtE9GHSPyj6gAonqqWR

bitcoinlgoo

Donate Dash

Xr4fdtP78Mh3gnVwAUjjuZRCq3kubaHZ5o

bitcoinlgoo

Donate Litecoin

LcrxGsshB2j9SddnZNdLfYMsDqAtw3Dr9v

bitcoinlgoo

Donate Iota

LXIVNBVHRYBOHRWNGMBNHOYMT9GBEFTPQMKDUZUYYHGMPXOOEYETMUQZXWXCGWBMTFERLW9LMCKNUDCKAMDOQCNDNZ

bitcoinlgoo

Visit on D.Tube!

Support us on D.Tube!

bitcoinlgoo

Donate Bitcoin Cash

14NCVeGCZfHf7tiy9N2Yz1mrBNi9m2mQ4S

bitcoinlgoo

Donate Ethereum

0xAF7d66B09F34833Ccec1Ed9e4D356D40c09698e5

bitcoinlgoo

Donate Ripple

raiZ2rCXLeBTUh2A4voKALZpMxQ88KxZxm

bitcoinlgoo

Donate Monero

42byh9AjzB3XXRptSeSfzAGC588HRZgVXAGMay6yYKjjAHinUxdQkxw3Ay1XcziXV86XY57aRqG5kGnJ8LFWmSjmAnUEnYh

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

WealthCE FX + Equity Analysis

Major 8 Economic Summaries
Economic Performance Index
Currency Market Sentiment
Equity Index Market Sentiment
Sector Strength Tracking
Equity EPS/PEG Estimates
Fundamental Firm Analysis
Trend Following Trading Plans

Robinhood is a SEC, FINRA, & SIPC member brokerage that lets you to buy and sell U.S. stocks/ETFS with ZERO commission. Sign up and get a free stock!

coinbase

Coinbase is a digital brokerage specializing in currencies. They allow you to trade US Dollars and Euros for Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.

coinbase

MyFxChoice is a regulated brokerage offering 200:1 Leverage on Foreign Exchange, Gold, and Silver. They offer 33:1 on Crude oils and up to 50:1 on equity indices like the FTSE100, DAX30, S&P500, and Nikkei.

Forex Tester 3 is a technical analysis back testing and simulated trading platform that serves as a testing platform for trading strategies.

Ledger Nano S - The secure hardware wallet

Sponsored Content

Option Profit Diagram Example

  • As you move to the right the underlying asset increases in value. The left side is lower in underlying price, while the right side is higher in underlying price.
  • As you move to the top the trade increases in profit. The gray horizontal line is the profit/loss difference point, the zero line where there is no profit and no loss. Higher above the line is higher in profit, lower below the line is higher in losses.
  • The blue line is the profit/loss at expiration. The purple line is the profit/loss now. Eventually the curving purple line will become the blue line.
  • A flat blue line below the grey zero line indicates limited losses at expiration. A flat blue line above the grey zero line indicates limited gains at expiration. A blue line that slopes down infinitely off the chart represents unlimited losses, while a line that slopes infinitely up represents unlimited gains.
  • A preference for limited loss trades is strongly recommended, remember that an estimated 60% to 70% of retail trader options expire worthless when purchased since prices need a reason to move in the money. If you have limited gains, they should preferably be both more likely than and higher than your potential losses. Always manage risk carefully.
  • Option diagrams created by TDAmeritrade “ThinkOrSwim” platform.