In finance an iron butterfly, also known as the ironfly, is the name of an advanced, neutral-outlook, options trading strategy that involves buying and holding four different options at three different strike prices. It is a limited-risk, limited-profit trading strategy that is structured for a larger probability of earning smaller limited profit when the underlying stock is perceived to have a low volatility.
To set up an iron butterfly, the options trader buys a lower strike out-of-the-money put, sells a middle strike at-the-money put, sells a middle strike at-the-money call and buys another higher strike out-of-the-money call. This results in a net credit to put on the trade, hence it is a credit spread.
If there is no arbitrage, the butterfly and iron butterfly have the following price relationship:
Famous quotes containing the word iron:
“Manhattan. Sometimes from beyond the skyscrapers, across the hundreds of thousands of high walls, the cry of a tugboat finds you in your insomnia in the middle of the night, and you remember that this desert of iron and cement is an island.”
—Albert Camus (1913–1960)