The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
Example: XYZ stock is trading at $60
Outlook: You are neutral on XYZ stock for the short term and are looking to generate some income using options.
Possible strategy: Construct the Iron Butterfly to take advantage of short term time decay.
Buy one 65 strike call at ($.45)
Sell one 60 strike call at $2.00
Sell one 60 strike put at $2.00
Buy one 55 strike put at ($.35)
Net Credit $3.20
- Maximum Profit = Profit potential is limited to the Net Credit received.
- Maximum Profit = $3.20
- Maximum Loss = 60 strike - 55 strike less the credit received
(60 - 55) - 3.20 = $1.80
- Breakevens = 60 strike + Net Credit
60 + 3.20 = $63.20
60 strike - Net Credit
60 - 3.20 = $56.80
In Summary: The Iron Butterfly is a limited risk and limited profit strategy. It is most profitable if XYZ stabilizes to the at-the-money strike at expiration.