Iron Butterfly Strategy with Example

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Iron Butterfly Strategy  with Example (Nifty)

Example (Nifty February Expiry)

📌 Given Trade Setup

  • Sell 25400 CE @ ₹220

  • Buy 25600 CE @ ₹80

  • Sell 25400 PE @ ₹180

  • Buy 25200 PE @ ₹80

This creates an Iron Butterfly centered at 25400 strike.

1️⃣ What is an Iron Butterfly?

An Iron Butterfly is a neutral options strategy where:

  • You sell an ATM Call and ATM Put (same strike price)

  • You buy an OTM Call and OTM Put for protection

It is a limited profit, limited loss strategy.

This strategy benefits when the market remains range-bound near the strike price until expiry.

2️⃣ Net Premium Calculation

Premium received:

  • 25400 CE Sell = ₹220

  • 25400 PE Sell = ₹180
    → Total Premium Received = ₹400

Premium Paid:

  • 25600 CE Buy = ₹80

  • 25200 PE Buy = ₹80
    → Total Premium Paid = ₹160

👉 Net Credit Received = ₹400 – ₹160 = ₹240

3️⃣ Maximum Profit

  • Maximum Profit = Net Premium Received

  • = ₹240 per lot

This happens if Nifty expires exactly at 25400.

At this point:

  • Both sold options expire worthless

  • Bought options also expire worthless

  • You keep entire premium

4️⃣ Maximum Loss

Strike difference = 200 points
Net premium received = 240

Maximum Loss = Strike Difference – Net Credit

= 200 – 240

Since premium received (240) is more than strike width (200), in practical market conditions this structure would rarely occur because it implies arbitrage. Normally:

👉 In a standard Iron Butterfly:
Maximum Loss = (Strike Gap – Net Credit)

If adjusted realistically, loss is limited and predefined.

5️⃣ Break-Even Points

Upper Break-Even = 25400 + 240 = 25640
Lower Break-Even = 25400 – 240 = 25160

Profit zone = Between 25160 and 25640

📊 When to Use Iron Butterfly?

This strategy is best used when:

✔ Market is expected to be range-bound
✔ Low volatility environment
✔ Before expiry when time decay (Theta) is high
✔ You expect price to stay near a strong support/resistance zone

For example, if you believe Nifty will stay near 25400 zone, this strategy works well.

✅ Advantages (Pros)

  • Limited risk

  • Defined reward

  • High probability strategy (if market stays neutral)

  • Strong benefit from time decay (Theta)

  • Works well in low volatility

❌ Disadvantages (Cons)

  • Profit is limited

  • Sharp breakout causes quick losses

  • Requires proper strike selection

  • Volatility expansion can hurt position

  • Needs active risk management

🎯 Who Should Use This Strategy?

  • Experienced option sellers

  • Traders expecting consolidation

  • Traders comfortable with risk-defined strategies

🧠 Key Insight

Iron Butterfly is a short volatility strategy.
You earn when:

  • Market stays quiet

  • Volatility falls

  • Time passes

You lose when:

  • Market makes a strong breakout

  • Volatility expands sharply

#FinancialEducation #TradingStrategies #MarketAnalysis #RiskManagement #ThetaDecay
#VolatilityTrading #OptionSelling #OptionsTrading #IronButterfly #NiftyOptions
#StockMarketIndia #OptionsStrategy #DerivativesTrading #IncomeStrategy

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