Butterfly Vs. Iron Butterfly

In this TradeHacker Video Lesson, we'll talk about the difference between a Butterfly Spread and an Iron Butterfly. They're essentially the exact same trade when it comes to looking at a risk profile and your risk verses reward, but there are a few little nuances that we want you to understand. For full details, watch our video!

Happy Trading!

The NavigationTrading Team

Connect with us!
Twitter @navtrading1

[aaronformella]

Thanks for pointing out liquidity issues and liquidity risk. Another difference is that the iron butterfly has assignment risk in both directions, while the butterfly has it in only one direction --that the trader gets to choose when setting up the trade structure (this risk applies to American style options e.g. SPY, not European style e.g. SPX). The assignment risk may be more difficult to manage in a situation where it turns into "pin risk, " when the underlying price is very close to the body of the butterfly (or iron butterfly) while the options are just about to expire. I read this elsewhere and adding it here to help the comments move toward completion the resource you've provided.

[yugeshkekre]

Thanks for keeping it short and simple

[ChaceBonanno]

Interesting point. The butterfly involves ITM options, which aren't as liquid. So iron flies are more liquid because they only consist of OTM options.

[pawbless]

so still sell iron butterfly is better than long butterfly, for 1. if the liquidity is the concern, 2. sell iron butterfly is credit, while long butterfly is debit. Thanks! it exactly answers my questions about the two. And also iron butterfly is a special iron condor, with pros and cons.

[tman]

Also, it allows one to roll down the untested side in iron flies. It's less intuitive to do so with butterflies.

[raymondedwardsjr]

Thank you! Super helpful. How reliable have you found TOS’s expected move indicator to be when setting the wings? Have the underlying stock moved pass them often or not?

[zofg]

what happens if there's a call or put skew to either side? then butterfly would be better? even for a rather illiquid option chain?

[brianbrener]

But one is a debit and the other is a credit. Why is that not mentioned? That is what makes me buy Iron butterfly and it DOES matter!!