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Iron Butterfly Spread

 Profile Version / Simplified Version / Comprehensive Version

Purpose Of Iron Butterfly Spread
1. To Profit On Stagnant Stocks
2. To Recieve A Net Credit


Expectations Of Iron Butterfly Spread
Stagnant


Type Of Spread
Credit Spread


How To Use Iron Butterfly Spread?
Buy To Open X number of Out Of The Money Call Options. 2. Sell To Open X number of At The Money Call Options. 3. Buy To Open X number of Out Of The Money Put Options. 4. Sell To Open X number of At The Money Put Options.

Buy OTM Call + Sell ATM Call + Buy OTM Put + Sell ATM Put 		Iron Butterfly Spread Risk Graph Learn How To Read This Chart

Profit Potential of Iron Butterfly Spread :
Iron Butterfly Spreads achieve their maximum profit potential at expiration if the price of the underlying asset is equal to the middle strike price. Maximum profit for the Iron Butterfly Spread is equal to the net credit gained when the position is put on.

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Profit Calculation of Iron Butterfly Spread:
Maximum Profit = Net Credit.
Profit % = (Credit Gained From Short Legs / Greatest Difference In Strike) x 100
Maximum Loss Possible = Greatest Difference In Strike - Net Credit


Risk / Reward of Iron Butterfly Spread:
Upside Maximum Profit: Limited to net credit gained

Maximum Loss: Limited to calculated maximum loss


Break Even Points (Profitable Range) of Iron Butterfly Spread:
An Iron Butterfly Spread is profitable as long as the price of the underlying stock stays within the Profitable Range bounded by the Upper and Lower BreakEven points.

Upper Break Even Point = Short Call Strike + Net Credit

Lower Break Even = Short Put Strike - Net Credit


Advantages Of Iron Butterfly Spread:
  • Able to profit on stagnant stocks.

  • Being a credit spread, it reduces overall risk with a higher probability of ending in a profit than a debit spread.

  • Maximum loss and profits are predictable.

  • Very versatile as position can be transformed into a Bear Call Spread or Bull Put Spread easily.


    Disadvantages Of Iron Butterfly Spread:
  • Larger commissions involved than simpler strategies with lesser trades.

  • Not a strategy that traders with low trading levels can execute.


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