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Advanced Options · ADV-07a · Advanced

Iron butterfly

How does iron butterfly express a short movement around one center view?

One concept per page · original written lesson · 581 prose words · authored, not installed or production-approved

What you will learn and prerequisites

Read first: Read a contract and its premium, Rights, obligations and expiration, Defined payoff risk is not margin, Read the whole multi-leg ticket

An iron butterfly sells a same-strike put and call and buys outer wings. It is a defined-terminal-risk version of a short straddle. The larger credit relative to some condors comes with a more concentrated maximum-profit location.

Construction: read every leg

Sell the two 100 options for 4.20 each and buy the 95 put and 105 call for 2.00 each. Credit is 440. Wing width is 500, so maximum loss is 60 before costs. Breakevens are 95.60 and 104.40. The 440 peak occurs at exactly 100 at expiry.

Read the ticket before the graph

BUY means you own an option right; SELL means you accept a short-option obligation. Positive quantities are long and negative quantities are short in the calculation. Check quantity, call/put, strike, multiplier and expiry before netting premium.

All legs in this example share November 20, 2026 expiration. The entry observation is October 6, 2026, with fictional QLT at 100. These are independent illustrative premiums, not a current option chain or executable quotes. The terminal diagram assumes every leg and any shares are resolved at one common settlement price.

Before expiry: time and volatility

Near the center, short Gamma/Vega and favorable time decay are typical intents, not universal signs. Reaching the body early does not instantly earn all credit because short options still have time value.

Manage the position deliberately

Costs matter on four entry contracts and any exit. Compare the narrow target with the available premium and event risk. Do not evaluate the reward/risk ratio as though it were an expected return.

Fictional teaching ticket · no order submission

Iron butterfly

QLT • reference spot $100 • independent illustrative prices • quote date 2026-10-06

Read action, quantity, type, strike, expiry, premium and multiplier before the payoff
ActionQtyTypeStrikeExpiryPremium/unitMultiplier
BUY1Put952026-11-202100
SELL1Put1002026-11-204.2100
SELL1Call1002026-11-204.2100
BUY1Call1052026-11-202100
Opening option cash (+received / −paid)440 USD
Entry option fees in cost variant2.6 USD
Shares included0
Joint-terminal results—not a guarantee of interim cash requirements
MeasureBefore costsAfter stated entry fees
Maximum terminal profit440437.4
Maximum terminal loss magnitude6062.6
Breakeven settlement price(s)95.6, 104.495.626, 104.374

This is a mathematical expiry experiment using the displayed legs, not an executable quote. The slider range is not a risk limit.

$0.65 per option contract on entry only. No exit, assignment, financing or tax costs modeled.

Independent fictional premiums, not one simultaneous arbitrage-consistent chain. All legs realized simultaneously at intrinsic at the same expiry; terminal calculations do not model American early exercise, temporary unhedged positions, forced liquidation or live liquidity. Displayed chart domain is not a tail-risk cap.

From opening cash to a settlement result

Read the opening instructions: buy 1 95 put at 2.00; sell 1 100 put at 4.20; sell 1 100 call at 4.20; buy 1 105 call at 2.00. Option opening cash is $440.00 received as a credit. A received credit is not earned profit while the obligation remains open.

Set the common settlement price to 103.00. Calls have intrinsic value max(S−K,0); puts have max(K−S,0). Subtract the opening premium from each intrinsic value, then multiply by signed quantity and the 100-unit multiplier. Shares contribute their price change from their own cost. The calculation popup shows every leg.

The combined result is $140.00 before costs and $137.40 after illustrative opening fees of $2.60. Exit fees, slippage, funding, dividends and taxes are not included. Opening fees are 0.65 per option contract, not a statement of any broker's pricing.

Maximum terminal profit is $440.00; maximum terminal loss magnitude is $60.00, before costs. Isolated zero-P/L settlement points in the model: 95.6, 104.4. Move the scenario slider across each strike and explain why the slope changes there. A strike is a contract threshold, not a prediction.

This terminal model is useful for comparing risk shapes, but actual American-style assignment, share delivery, forced liquidation or a failed multi-leg exit can produce a different path. A long protective leg is not an automatic instruction that a broker must exercise it when another leg is assigned.

Open the calculation without leaving this lesson

Calculate this exact ticket

Same-page calculation. Closing restores the lesson position and originating control.

P/L = Σ[q × multiplier × (intrinsic − opening premium)] + shares × (S−share entry) − costs

Intrinsic is nonnegative before the signed quantity is applied. This is a fictional terminal calculation.

  1. +1 × 100 × (0.00 − 2.00) = $-200.00: 95 put.
  2. -1 × 100 × (0.00 − 4.20) = $420.00: 100 put.
  3. -1 × 100 × (3.00 − 4.20) = $120.00: 100 call.
  4. +1 × 100 × (0.00 − 2.00) = $-200.00: 105 call.
  5. Opening fees: 2.60.
Before costs $140.00; after entry fees only $137.40.

Maximum risk and breakevens

Same-page calculation. Closing restores the lesson position and originating control.

Evaluate S=0, all strikes and the final tail slope; solve P/L=0 on each linear segment.

Same-expiry payoffs are piecewise linear. A finite chart range cannot prove a tail is bounded.

  1. Maximum terminal profit is $440.00; maximum terminal loss magnitude is $60.00, before costs.
  2. Breakeven points: 95.6, 104.4.
  3. Costs shift net P/L downward without moving the strikes.
Maximum terminal profit is $440.00; maximum terminal loss magnitude is $60.00, before costs.

The whole ticket at common expiry

Vertical: P/L per complete ticket (USD)
Horizontal: Underlying settlement price (USD)

The whole ticket at common expirySolid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range. The complete numerical data are available below.-107.83410.7796129.393248.007366.62485.234808896104112120
1. Combined terminal P/L before fees2. Combined terminal P/L after entry fees
Solid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range.
See the individual legs behind the combined curveThe whole ticket at common expirySolid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range. The complete numerical data are available below.-1,839.2-1,159.52-479.84199.84879.521,559.2808896104112120
1. Combined terminal P/L before fees2. Combined terminal P/L after entry fees3. Leg 1: BUY 1 95 put4. Leg 2: SELL 1 100 put5. Leg 3: SELL 1 100 call6. Leg 4: BUY 1 105 call
Read the graph as a data table
Complete graph data; original fictional observations or model calculations
Underlying settlement price (USD)Combined terminal P/L before feesCombined terminal P/L after entry feesLeg 1: BUY 1 95 putLeg 2: SELL 1 100 putLeg 3: SELL 1 100 callLeg 4: BUY 1 105 call
80-60-62.61,300-1,580420-200
80.5-60-62.61,250-1,530420-200
81-60-62.61,200-1,480420-200
81.5-60-62.61,150-1,430420-200
82-60-62.61,100-1,380420-200
82.5-60-62.61,050-1,330420-200
83-60-62.61,000-1,280420-200
83.5-60-62.6950-1,230420-200
84-60-62.6900-1,180420-200
84.5-60-62.6850-1,130420-200
85-60-62.6800-1,080420-200
85.5-60-62.6750-1,030420-200
86-60-62.6700-980420-200
86.5-60-62.6650-930420-200
87-60-62.6600-880420-200
87.5-60-62.6550-830420-200
88-60-62.6500-780420-200
88.5-60-62.6450-730420-200
89-60-62.6400-680420-200
89.5-60-62.6350-630420-200
90-60-62.6300-580420-200
90.5-60-62.6250-530420-200
91-60-62.6200-480420-200
91.5-60-62.6150-430420-200
92-60-62.6100-380420-200
92.5-60-62.650-330420-200
93-60-62.60-280420-200
93.5-60-62.6-50-230420-200
94-60-62.6-100-180420-200
94.5-60-62.6-150-130420-200
95-60-62.6-200-80420-200
95.5-10-12.6-200-30420-200
95.6-5.50671e-13-2.6-200-20420-200
964037.4-20020420-200
96.59087.4-20070420-200
97140137.4-200120420-200
97.5190187.4-200170420-200
98240237.4-200220420-200
98.5290287.4-200270420-200
99340337.4-200320420-200
99.5390387.4-200370420-200
100440437.4-200420420-200
100.5390387.4-200420370-200
101340337.4-200420320-200
101.5290287.4-200420270-200
102240237.4-200420220-200
102.5190187.4-200420170-200
103140137.4-200420120-200
103.59087.4-20042070-200
1044037.4-20042020-200
104.4-5.50671e-13-2.6-200420-20-200
104.5-10-12.6-200420-30-200
105-60-62.6-200420-80-200
105.5-60-62.6-200420-130-150
106-60-62.6-200420-180-100
106.5-60-62.6-200420-230-50
107-60-62.6-200420-2800
107.5-60-62.6-200420-33050
108-60-62.6-200420-380100
108.5-60-62.6-200420-430150
109-60-62.6-200420-480200
109.5-60-62.6-200420-530250
110-60-62.6-200420-580300
110.5-60-62.6-200420-630350
111-60-62.6-200420-680400
111.5-60-62.6-200420-730450
112-60-62.6-200420-780500
112.5-60-62.6-200420-830550
113-60-62.6-200420-880600
113.5-60-62.6-200420-930650
114-60-62.6-200420-980700
114.5-60-62.6-200420-1,030750
115-60-62.6-200420-1,080800
115.5-60-62.6-200420-1,130850
116-60-62.6-200420-1,180900
116.5-60-62.6-200420-1,230950
117-60-62.6-200420-1,2801,000
117.5-60-62.6-200420-1,3301,050
118-60-62.6-200420-1,3801,100
118.5-60-62.6-200420-1,4301,150
119-60-62.6-200420-1,4801,200
119.5-60-62.6-200420-1,5301,250
120-60-62.6-200420-1,5801,300

The failure case

A settlement at a wing reaches the terminal loss cap. Frequent small misses and transaction costs can make the attractive peak less useful than it appears. Assignment is still a separate operational event.

Check your understanding

Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.

What is whole-position terminal P/L at QLT 103.00, before costs?

Reveal the worked answer

$140.00

Use all signed legs, not just the winning leg. The popup and graph use the same ticket.

Critical risk question

Does a terminal loss bound guarantee every early-assignment or liquidation outcome?

Reveal the worked answer

No.

It describes the specified common-settlement payoff. Product rules, stock delivery, capital and execution still matter.

Takeaway

Explain the intended short movement around one center exposure, each leg's obligation and the adverse price region before using the strategy name.

Sources, assumptions and downloadable script

External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.

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