Similar to a put or call butterfly, an iron butterfly is established as a net credit instead. It consists of a bull put spread and a bear call spread combined.
Short Iron Butterfly
Strategy Involves simultaneously selling a put option and a call option at one strike price, buying a put option and a call option at a higher strike price, and selling a put option and a call option at an even higher strike price. All of the options have the same expiration date and are typically used in a neutral market outlook. The strategy is designed to profit from a narrow trading range in the underlying security.
The trader profits from the strategy if the price of the underlying security remains within a certain price range at expiration. If the price of the security is outside of this range, the trader will experience a loss.
Leg 2 plus the net credit received
Leg 2 minus the net credit received
Stock price to be exactly at Leg 2
Limited to the net credit received
Limited to Leg 2 minus Leg 1, minus the net credit received
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