Straddle Spread
One could argue that an Iron Butterfly is actually just a Straddle Spread.
When I first started trading option spreads, the butterfly spread always seemed to be a mysterious, complicated, and difficult to understand option trading strategy. And – rather than take the time to sit down and really try to understand what this option strategy did, how it was constructed, and how it worked, I just went off and spent my time trading what seemed to be easier to understand strategies like option credit spreads, debit spreads, and iron condors.
However, after a bit of time trading these other strategies – I found myself coming back to revisit the butterfly spread – and the second time around – I found a simpler way to understand exactly what the option butterfly spread is, how it’s constructed, and how it works:
A call butterfly is simply a call debit spread and a call credit spread ‘glued’ together at the short strikes. Traditionally – the short strikes are sold ATM (at the money) either at or near the strike with the most time premium.
A put butterfly is exactly the same – only constructed with puts. It’s a put debit spread and a put credit spread ‘glued’ together at the short strikes – which most often are placed ATM.
An Iron Butterfly is basically an Iron Condor – a spread made up of a bull put spread and a bear call spread – with the short strikes ‘glued’ together ATM
Another way to think of the Iron Butterfly is as a straddle spread: it’s the sale of a Straddle – usually ATM – with wings bought for protection.
