---
description: "A neutral income strategy combining a bull put spread and a bear call spread around a central ATM strike K2, collecting net credit when stock stays near K2."
tags: [options, income, neutral, butterfly, iron]
---

# Long Iron Butterfly

**Section**: 2.44 | **Asset Class**: Options | **Type**: Income

## Overview
The "long" iron butterfly is a sideways strategy combining a bull put spread and a bear call spread. It consists of a long OTM put at K1, short ATM put and ATM call at K2, and long OTM call at K3. The strikes are equidistant: K2 - K1 = K3 - K2 = kappa. This is a net credit trade. The trader's outlook is neutral. This is an income strategy.

## Construction
- Buy 1 OTM put option at strike K1 (lower wing)
- Sell 1 ATM put option at strike K2 (body)
- Sell 1 ATM call option at strike K2 (body, same strike as put)
- Buy 1 OTM call option at strike K3 (upper wing)
- All same expiry; K2 - K1 = K3 - K2 = kappa (equidistant)

Net credit: C

## Payoff Profile
f_T = (K1 - S_T)+ - (K2 - S_T)+ - (S_T - K2)+ + (S_T - K3)+ + C

- Upper breakeven: S*_up = K2 + C
- Lower breakeven: S*_down = K2 - C
- Max profit: P_max = C  (if K1 <= S_T <= K3; both spreads expire worthless)
- Max loss: L_max = kappa - C  (if S_T <= K1 or S_T >= K3)

## Key Conditions / Signals
- Neutral; expects stock to remain close to K2 through expiry
- High implied volatility environment makes the collected credit larger
- Defined risk on both sides unlike a short straddle

## Notes
The long iron butterfly achieves the same payoff as the short call butterfly or short put butterfly but is constructed using four legs across two spreads. The maximum loss is limited (kappa - C) unlike in a naked short straddle.