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Reverse iron butterfly
A strategy combining a bull spread on put options and a bear spread on call options on the same underlying with the same maturity at three different exercise prices. A long iron butterfly refers to the purchase of a put option with a lower exercise price and of a call option with a higher exercise price, and to the simultaneous sale of another put option and another call option at the same middle exercise price. A short iron butterfly (or reverse iron butterfly) refers to the sale of a put option with a lower exercise price and a call option with a higher exercise price, and to the simultaneous purchase of another put option and another call option at the same middle exercise price.
(1) In practice, in a long position, the options purchased are generally out of the money and the options sold at the money or close to the money. In a short position, the options sold are out of the money and the options purchased are at the money or close to the money.
(2) Like the butterfly, this strategy is used in a long position to limit losses in the event of major instability in the price of the underlying and to generate a limited profit in the event of relative price stability in the underlying. However, unlike the butterfly strategy, which is constructed using either call options or put options, the iron butterfly strategy combines both put options and call options. In addition, the trade results in a net inflow to the buyer and a net outflow to the seller.
(3) The iron butterfly is similar to the iron condor, the difference being that the two options sold (or purchased, in a short position) have the same exercise price.
Translations
Synonyms and variations
- Iron butterfly
- Iron butterfly spread
- Long iron butterfly
- Short iron butterfly