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In [[finance]] an '''iron butterfly,''' also known as the ironfly, is the name of an advanced, neutral-outlook, [[options strategies|options trading strategy]] that involves buying and holding four different options at three different [[strike price]]s. 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: | |||
<math>\mbox{ironfly} = \Delta(\mbox{butterfly strike price}) \times (1+rt) - \mbox{butterfly} </math> | |||
==References== | |||
* {{cite book | |||
| last = McMillan| first = Lawrence G. | |||
| title = Options as a Strategic Investment | |||
| edition = 4th ed. | |||
| publisher = New York : New York Institute of Finance | |||
| year = 2002 | |||
| isbn = 0-7352-0197-8 | |||
}} | |||
{{investment-stub}} | |||
{{Derivatives market}} | |||
[[Category:Options (finance)]] | |||
[[Category:Derivatives (finance)]] | |||
Revision as of 22:22, 9 April 2013
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:
References
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