Iron Butterfly

We view iron condor as a short strangle sold with near OTM strike prices and long strangle bought with far OTM Strike prices. When we replace the short strangle with a short straddle, what becomes is called an Iron Butterfly.

Setup:

Sell ATM Straddle
Buy OTM Strangle

Ideal IV Environment: High (As ATM Straddles will have more premium)

Here goes an example – https://unofficed.com/options-calculator/?save_id=5dde19e844b6b225998992

Short 31800CE at 133.
Short 31800PE at 164.
Buy 31700PE at 116.
Buy 31900CE at 91.

Maximum Profit: The net premium we will receive here is credit from the short straddles sold – debit from long strangles bought. If the spot expires at the straddle’s strike price, it will be our maximum profit!

Max Loss: The maximum loss if the lower breakeven is breached is
= Profit from the call short spread (Straddle’s CE leg short + Strangle’s CE leg long) – Loss from the put short spread (Straddle’s PE leg short + Strangle’s PE leg long)
= (133-91) – {(31800-31700)-(164-116)}
= -10

How to Calculate Breakeven(s): It is just the same as the calculation of Iron Condor.