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Iron Butterfly Strategy Explained: Sell Premium With Capped Risk

How the iron butterfly works: four legs, payoff, breakevens and max loss, and how it compares with a short straddle on NIFTY.

Dipendu 07 Nov 2026 · 3 min read

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Many option sellers like the idea of a short straddle: collect premium and let time decay work. What they don't like is the unlimited risk. The iron butterfly (often called an iron fly) keeps most of the straddle's logic but caps the worst case.

This guide explains how an iron butterfly works, its payoff and breakevens, how it compares with a short straddle, and how to build and test one on OPIFY.

Iron butterfly: Sell an ATM call and an ATM put (a short straddle), and buy an OTM call and an OTM put as protection. All four legs have the same expiry.

The four legs

Example: NIFTY at 25,000.

Leg	Action	Strike	Premium
1	Sell CE	25,000	₹120 received
2	Sell PE	25,000	₹110 received
3	Buy CE	25,300	₹25 paid
4	Buy PE	24,700	₹22 paid

Net credit: 230 – 47 = ₹183. Prices are illustrative.

Payoff, breakevens and risk

Metric	Formula	Example
Max profit	Net credit	₹183 (if NIFTY expires at 25,000)
Max loss	Wing width – net credit	300 – 183 = ₹117
Upper breakeven	ATM strike + net credit	25,183
Lower breakeven	ATM strike – net credit	24,817

The payoff chart looks like a straddle's inverted V, but with flat "wings" on both sides. Beyond the bought strikes, losses stop growing.

Iron butterfly vs short straddle

	Short straddle	Iron butterfly
Max profit	Higher	Lower (you pay for the wings)
Max loss	Unlimited	Capped
Breakevens	Wider	Narrower
Margin	High	Usually much lower, thanks to the hedge
Gap risk	Severe	Limited to max loss

Choosing the wings: Closer wings cost more and lower your max profit, but also lower your max loss. Wider wings give more profit but more risk. Try different widths in the strategy builder and compare risk-reward.

When traders use an iron butterfly

They expect the index to stay close to the current level.
IV is relatively high and expected to fall.
They want to sell premium but with a defined worst case.
They want lower margin than a naked straddle.

Managing an iron butterfly

Many traders exit when they've captured a set percentage of max profit, rather than holding to expiry.
If the index moves toward one breakeven, they may adjust by shifting the short strikes.
A combined stop-loss on the whole position keeps losses below the theoretical max.

Build an iron butterfly on OPIFY

Open the Strategy Builder and pick NIFTY, BANKNIFTY or SENSEX.
Choose the Iron Butterfly ready strategy, or add the four legs yourself.
Change the wing strikes and compare max profit, max loss, breakevens, POP and margin.
Check projected Greeks and use Estimated P&L to see the position before expiry.

Test how it performs over time

Run the iron butterfly with your entry time and exit rules across years of data in the options backtester. Check the win rate, max drawdown and worst trades before committing real money.

Frequently asked questions

Is an iron butterfly safer than a short straddle?

Its maximum loss is capped, which makes the worst case far smaller. It still loses money if the index moves beyond the breakevens.

Iron butterfly vs iron condor?

An iron condor sells OTM options instead of ATM. It has wider breakevens but collects less premium.

Cap your risk. Build an iron butterfly in the Strategy Builder and compare it side by side with a short straddle.

This article is for education only and is not investment advice. Options trading involves risk.

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