---
description: "A neutral volatility strategy combining a bear put spread and a bull call spread around a central ATM strike K2, paying a net debit to profit from a large move away from K2."
tags: [options, volatility, neutral, butterfly, iron]
---

# Short Iron Butterfly

**Section**: 2.45 | **Asset Class**: Options | **Type**: Volatility

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

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

Net debit: D

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

- Upper breakeven: S*_up = K2 + D
- Lower breakeven: S*_down = K2 - D
- Max profit: P_max = kappa - D  (if S_T <= K1 or S_T >= K3)
- Max loss: L_max = D  (if S_T = K2; long straddle at center expires at minimum)

## Key Conditions / Signals
- Neutral; expects a large move away from K2 in either direction
- Low implied volatility environment makes the debit cheaper to enter
- Defined risk on both sides unlike a naked long straddle

## Notes
The short iron butterfly achieves the same payoff as the long call butterfly or long put butterfly but uses four legs spanning two spreads. The maximum loss is the net debit D, occurring when the stock pins at K2 at expiry.