When you anticipate that the price of the underlying asset will not change much and the fluctuation will slow down for some time to come, you can use the Short Iron Butterfly.

How to build

● Buy 1 call 1

● Sell 1 copy of Call2

● Sell 1 copy of put1

● Buy 1 copy of put2

The underlying assets, quantity, and expiration dates for Call1, Call2, Put1, and Put2 are all the same. The differences are as follows:

Exercise price: call1>call2=put1>put2, and call1-call2=put1-put2;

Strategy brief

The Short Iron Butterfly strategy is an options strategy with limited return and risk.

When the price of the underlying asset fluctuates between a high break-even point and a low break-even point, this strategy yields positive returns.

When the stock price is greater than the high break-even point or less than the low break-even point, the strategy makes a loss, but the loss is limited.

Short Iron Butterfly is a four-legged strategy, so it also has two major characteristics of a multi-leg strategy:

First, transaction costs are relatively high, so you need to pay attention to processing fees.

Second, after establishing a strategy, it is possible to split legs flexibly according to the actual trend of the underlying asset:

First, if you separate the trading call and trade put parts, this strategy is actually a combination of a bear call option spread and a bull market put option spread.

Second, if you only look at the middle part of this strategy, which actually sells a cross-modal combination, the two-sided buying options transaction actually limits the risk of selling the cross-modal combination. At the same time, the maximum return also decreases.

However, if you only look at the two ends of the buying transaction, you will find that this is a broad-span buying strategy. Coupled with options trading sold in the middle, it reduces the cost of opening a position, and at the same time limits the maximum profit margin.

Finally, you can also look at the break-even chart. You can also find that this strategy is similar to buying a butterfly spread. The differences are:

First, butterfly spreads can only be constructed using one type of option (call or put).

Second, the buying butterfly strategy usually has negative cash flow at the beginning of opening a position, while the cash flow is often positive at the beginning of opening a position with a Short Iron Butterfly price difference. This difference makes these two strategies both take different risks and respond to different situations in the trading process.

Risks and benefits

● Break-even point

Low break-even point: stock price = median exercise price - net option premium

High break-even point: stock price = intermediate exercise price+net option premium

● Maximum profit

Net option premium

● Maximum loss

Maximum loss = high exercise price - intermediate exercise price+net option premium

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You don't expect the asset price to fluctuate much in the future, so you have created a Short Iron Butterfly strategy:

Buy 1 call with an exercise price of 56 US dollars at a price of 2 US dollars;

Sell 1 call at a price of 3 US dollars with an exercise price of 52 US dollars;

Sell 1 put with an exercise price of 52 US dollars at a price of 2 US dollars;

Buy 1 put with an exercise price of $48 at a price of $1.5.

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.