Iron Butterfly Option Strategy
What are the characteristics of this option strategy?
The Iron Butterfly Option Strategy is an advanced options trading strategy that involves writing two ATM options-call and put, while buying two OTM options-call and put options with the same expiration date. The Iron Butterfly Option Strategy is very similar to an Iron Condor, however instead of selling two options at different strike prices, the Iron Butterfly takes advantage of the increased cost of selling two options at the same strikes. The Iron Butterfly Strategy can be used to generate either steady income or capitalize on any price movement in the underlying stock or other asset.
Is this a bullish, bearish or neutral strategy?
The Iron Butterfly Option Strategy is a neutral strategy. This means it is not specifically designed to penetrate either a bullish or bearish market, but rather to capitalize on minimal price fluctuations in the underlying asset.
Is this a beginner or an advanced option strategy?
The Iron Butterfly Option Strategy is an advanced option strategy. It requires an in-depth understanding of both options trading and the underlying asset. However the downside of the strategy is capped limiting the risk.
In what situation will I use this strategy?
The Iron Butterfly Option Strategy is best used when the investor believes that the price of the underlying asset will remain relatively stable, or will make small movements in either direction. If used correctly, the Iron Butterfly Option Strategy can generate a steady stream of income for the investor.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Iron Butterfly Option Strategy can be a relatively low-risk strategy with an attractive reward-to-risk ratio. This strategy typically combines a limited downside risk with an attractive probability of profit. It can also be adjusted if the trade goes against the investor, helping to limit losses in the event of unexpected price movement.
How is this strategy affected by the greeks?
The Iron Butterfly Option Strategy is affected by the greeks – Delta, Gamma, Theta and Vega – just like any options trading strategy. Delta measures the sensitivity of the option to a change in the price of the underlying asset, Gamma measures the rate of change in the delta, Theta measures the time decay of the option price, and Vega measures the rate of change in the option price due to a change in implied volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Iron Butterfly Option Strategy is typically most effective when volatility is relatively low and expected to remain low. When volatility is high, the costs associated with buying and selling multiple options can become prohibitively expensive.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
The Iron Butterfly Option Strategy can be easily adjusted if the trade goes against the investor. Adjustments can be made by either closing the original positions and opening new ones, or by adding additional option contracts to the existing positions. This strategy is relatively easy to adjust when the trade goes against the investor, and can help to limit losses in the event of unexpected price movement.
Where does this strategy typically fall in the range of commissions and fees?
The Iron Butterfly Option Strategy typically falls in the mid- to high-range of commissions and fees. Since this strategy involves writing two ATM options and buying 2 OTM call options, the overall strategy usually ends up in credit (net positive premium).
Is this a good option income strategy?
The Iron Butterfly Option Strategy can be a good option income strategy for the investor who is willing to take the risk. This strategy can generate income in the form of the premiums generated from selling options, as well as from any price movement in the underlying asset.
How do I know when to exit this strategy?
The investor should plan to exit the Iron Butterfly Option Strategy at the expiration date of the option contracts, or earlier when profits have been generated. The investor should also pay attention to the underlying asset’s price and make any adjustments as needed.
How will market makers respond to this trade being opened?
Market makers generally don’t have an opinion on the Iron Butterfly Option Strategy. They respond in the same manner to any option strategy, by setting the option prices based on the bid-ask spread for that particular option.
What is an example (with calculations) of this strategy?
Consider a stock trading at a price of $265. A trader can execute iron butterfly option strategy by selling two options – 1 call and 1 put with a strike price of $265, buying one call option with a strike price of $275 and 1 put option with a strike price $255. The investor enters this trade by earning a net premium of $690. If the stock stays between $260 to $270 at expiration, the investor will make a maximum profit of $690. If the stock breaks the range of 255-275, the investor will make a maximum loss of $310.
Where does MarketXLS come in?
MarketXLS can help investors in a variety of ways when using the Iron Butterfly Option Strategy. Through its Iron Butterfly Explained and Excel Template, MarketXLS provides a comprehensive guide that includes a detailed overview of the strategy, a step-by-step guide on how to set up the strategy, a real-time trade simulation, and other helpful tips and tricks. MarketXLS also provides real-time stock and options data, allowing investors to backtest the strategy to evaluate its effectiveness before actually placing a trade.
Here are some templates that you can use to create your own models
Iron Butterfly Option Strategy
Reverse Iron Butterfly Spread
Reverse Iron Albatross Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Are Butterfly Spreads Right for You?
Benefits of Being Delta Positive
Short Iron Butterfly (Explained With Excel Template)
2 Leg Option Strategies
Reverse Iron Butterfly Options Strategy (Using MarketXLS Template)