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:
“Along the iron veins that traverse the frame of our country, beat and flow the fiery pulses of its exertion, hotter and faster every hour. All vitality is concentrated through those throbbing arteries into the central cities; the country is passed over like a green sea by narrow bridges, and we are thrown back in continually closer crowds on the city gates.”
—John Ruskin (1819–1900)