Iron Butterfly Spread
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The Iron Butterfly Spread is actually an Iron Condor. Even when in my option trading software platform - when selecting from their ‘trading strategies’ to place - when wanting to select an Iron Butterfly - it’s not one of their options. You must select ‘Iron Condor’ instead.
However, the payoff diagram of an Iron Butterfly looks just like the payoff diagram of a regular butterfly - and for the most part they act the same during the duration of the trade.
While a regular butterfly spread is made up of only calls or only puts - the iron butterfly spread is made up of both calls and puts - just like an iron condor spread. However unlike a traditional iron condor spread where the short strikes of the trade are placed some distance apart from each other - with the Iron Butterfly Spread - the shorts are sold at the SAME strike.
An example of an Iron Butterfly might look as follows:
Buy 1 50 Put
Sell 1 55 Put
Sell 1 55 Call
Buy 1 60 Call
Another way to think of the iron butterfly spread is to break the two halves of the spread apart. When you do, you can find that the iron butterfly is simply two vertical spreads - or credit spreads. A 55/50 Put Credit Spread and a 55 / 60 Call Credit Spread - with the short strikes of the two spread ‘glued’ together at the middle.
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