What is an iron butterfly, and how does it differ from an iron condor in terms of construction and profit potential?

An iron butterfly is a volatility-selling strategy where the two short options share the same strike price (typically at-the-money), creating a more concentrated profit zone but with higher maximum profit compared to an iron condor.\n\nConstruction:\n\nThe iron butterfly has four legs like the condor, but the short put and short call are at the same strike:\n\n1. Buy one OTM put (lower strike)\n2. Sell one ATM put (middle strike)\n3. Sell one ATM call (same middle strike)\n4. Buy one OTM call (upper strike)\n\nThe short legs form a short straddle at the center strike, while the long legs provide defined-risk protection.\n\nWorked Example:\n\nArcstone Semiconductor trades at $120. Trader Damon constructs an iron butterfly expiring in 30 days:\n\n| Leg | Strike | Premium | Action |\n|---|---|---|---|\n| Buy put | $110 | -$1.20 | Protection |\n| Sell put | $120 | +$4.50 | Income (ATM) |\n| Sell call | $120 | +$4.80 | Income (ATM) |\n| Buy call | $130 | -$1.45 | Protection |\n\nNet premium received: $4.50 + $4.80 - $1.20 - $1.45 = $6.65 per share\n\nMaximum Profit:\nOccurs only if the stock closes exactly at $120 at expiration (the shared short strike). All options except the long put expire worthless.\n\nMax profit = Net premium = $6.65 per share ($665 per contract)\n\nMaximum Loss:\nOccurs when the stock moves beyond either long strike.\n\nMax loss = Width of spread - Net premium = $10.00 - $6.65 = $3.35 per share\n\nBreakeven Points:\nLower breakeven = Short strike - Net premium = $120 - $6.65 = $113.35\nUpper breakeven = Short strike + Net premium = $120 + $6.65 = $126.65\n\nIron Butterfly vs Iron Condor:\n\n| Feature | Iron Butterfly | Iron Condor |\n|---|---|---|\n| Short strikes | Same (ATM) | Different (OTM) |\n| Max profit | Higher premium collected | Lower premium collected |\n| Profit zone width | Narrower | Wider |\n| Probability of max profit | Lower (stock must pin exactly) | Higher (stock can be in a range) |\n| Risk-reward | Often > 1.0 | Often < 1.0 |\n| Best when | Expecting pinning at a strike | Expecting range-bound trading |\n\nWhen to Choose the Butterfly:\n- Earnings plays where you expect the stock to stay near the current price\n- High implied volatility (larger premium collected on ATM options)\n- When you have a strong view on where the stock will settle\n\nThe condor is generally more forgiving because its profit zone spans a wider range, but the butterfly rewards precision with a higher payout.\n\nDeepen your multi-leg options knowledge in our CFA Derivatives modules.