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Long Iron Butterfly
eitherwaysLong Iron Butterfly is a Volatility strategy. It involves very high risk for limited reward
Example:
| Instrument | Qty | Price |
|---|---|---|
| SELL NIFTY 30-Jun-26 22600 PE | 65 | 1.85 |
| BUY NIFTY 30-Jun-26 24100 PE | 65 | 108.2 |
| BUY NIFTY 30-Jun-26 24100 CE | 65 | 101.25 |
| SELL NIFTY 30-Jun-26 25600 CE | 65 | 0.75 |
When To Execute?
Long Iron Butterfly is a combination of Bear Put Spread and Bull Call Spread. With Short Iron butterflies, you are looking for big move in stock either direction. You are expecting surge in volatility.In scenario where strike difference is not equal it is known as Modified Long Iron Butterfly.
Trade
Sell 1 lot OTM Put, Buy 1 lot ATM Put, Buy 1 lot ATM Call and Sell 1 lot OTM Call
Advantages
It is executed when stock had been range bound for long time and is about to give a breakout/breakdown. It is idle to trade long term option as negative time decay impact will be least
Disadvantages
Time decay is generally harmful to the option position
Maximum Profit
Your maximum reward is the difference between any adjacent strike prices less the net debit. (Strikes are equip-distance from each other).
Maximum Loss
Maximum risk is your net debit you pay