Investment Type: Credit
Strike Prices: OTM for 1st leg, ATM/ITM for 2nd leg, ATM/ITM for 3rd leg, OTM for 4th leg.
Expiration Month: Same expiration months for all legs and should be current month
Composition: Sell lower strike Put + Buy middle strike Put + Buy same middle strike Call + Sell higher strike Call
| Short Iron Butterfly Profile Chart | ||
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Short Iron Butterfly is the opposite of Long Iron Butterfly. This strategy is not popular as they product net debit and doesn’t have good risk reward ratio compared to straddle and strangle.
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Entry:
Investment @ Entry = (Premium of lower strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Call Leg x No of Contracts x 100 Shares) + (Premium of higher strike Call Leg x No of Contracts x 100 Shares) = ($1,500) + $4,250 + $2,000 + ($500) = $4,250
Breakeven Point Down = middle strike – Net Debit = $35.00 - $1.70 = $33.30
Exit: Best Case Scenario:
OR
Profit @ Exit = (Premium of lower strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Call Leg x No of Contracts x 100 Shares) + (Premium of higher strike Call Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $6,250 + $0 + $0 - $4,250 = $2,000 OR
Profit @ Exit = (Premium of lower strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Call Leg x No of Contracts x 100 Shares) + (Premium of higher strike Call Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $0 + $6,250 + $0 - $4,250 = $2,000
Return of Investment = Profit @ Exit / Investment @ Entry = 47%
Worst Case Scenario : Investment @ Entry
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