An Iron Butterfly is a potential income strategy that sells a Credit Put Spread, while simultaneously selling a Credit Call Spread with the same short strike level and in the same expiration.
An investor with a strong Neutral view might use an Iron Butterfly when looking for a defined risk strategy that sees profits if a stock sees little to no movement from the short strike level.
The strategy might also be used instead of a Short Straddle. Here an investor may be willing to accept less potential income in exchange for defining risk and lowering the margin required.
Maximum Gain from the Iron Butterfly may be realized if the stock finishes exactly at the short strike, or “guts” of the spread. Therefore, its zone of Max Gain is far narrower than that of an Iron Condor.
Losses may occur if the stock moves above or below either of the two breakevens and Maximum Loss would occur with the stock outside of either spread, or the ‘wings’ at expiration.