Like Iron Condor but the sold strikes sit at ATM, giving higher profit and a narrower profit range.
The structure
The Iron Butterfly (Iron Butterfly) is a condor whose wings were pulled in until they meet in the middle: sell a call and a put at the same strike (usually at the money) and buy two protective wings above and below. Its credit is fatter than the condor's because the short options sit in the heart of the time value, and its profit zone is narrower.
When to use it
Expecting very little movement around one level: after an event that has spent its charge, or an expiration week where price is expected to pin near a crowded strike. A bet on no movement in its tightest form.
Maximum profit and loss
Maximum profit is the full credit, reached on a close exactly at the middle strike, and it shrinks moving away from it. Maximum loss is the wing width minus the credit, reached at either end. The two break-evens are the middle strike plus and minus the net credit.
Hypothetical example
A stock at $100 after earnings: sell a call and a put at the $100 strike for a total credit of $6 and buy two wings at $90 and $110. A close between $94 and $106 is a graduated profit, peaking at $6 at exactly 100.
Common mistake
Using it before the event, not after: its short at-the-money body is the most explosive point when surprises hit. The butterfly is for the calm that follows the storm, not the calm before it.
When to prefer it over the condor
The butterfly has narrower wings, so it pays more if you hit the position exactly and is less likely to succeed. Choose it when the analyst has a view on one specific level (a gamma magnet, say) and not just an expectation of calm. Choose the condor when it is enough for price to stay in a wide range.
Where to see it on the platform
The calculator builds it and draws its tent shape, and Max Pain on the gamma dashboard often points to the level where the close gets pinned in expiration week.
The structures calculator builds it with its legs and draws its limits, and the gamma dashboard shows the magnet level it is built around.
