Iron Butterfly

An iron butterfly is a four-leg options strategy that sells an at-the-money (ATM) straddle — a call and put at the same strike — while buying out-of-the-money (OTM) wings for protection. All legs share the same expiration. The result is a net credit that represents maximum profit if the stock pins exactly at the short strike at expiration. It's essentially a tighter version of an iron condor, with the short strikes collapsed to a single price.

The iron butterfly offers a higher maximum profit than the iron condor because selling ATM options collects more premium. However, the probability of maximum profit is lower since the stock must close at exactly one price. In practice, the strategy still profits as long as the stock stays within a range — but that range is narrower than a comparable iron condor. Typical iron butterflies have a 30-40% probability of full profit, compared to 70-80% for iron condors.

Iron butterflies work best when you expect very low realized volatility — the stock should barely move. Options Pilot's Value pillar helps identify when IV is elevated (making the credit richer) while the Timing pillar ensures no catalysts will disrupt the pin. Because the strategy has four legs, the Liquidity pillar is critical: wide bid-ask spreads on four legs can quickly erode the theoretical edge.