DaytradeTeam Brainzzzz

A Long Iron Butterfly Spread is designed to profit from stocks that stay within a certain price range. It is a combination of a Bull Put Spread and a Bear Call Spread. In a Long Iron Butterfly, the higher strike put option shares the same strike price as the lower strike call option. This combination creates an income-producing strategy that has a butterfly shape to its risk plot profile:

Notice how the profitability of the spread is maximized when the stock's price is exactly on the shared strike price mentioned above, and loss is limited if the stock moves outside of the profitable range.

Steps to Trading a Long Iron Butterfly:

1. Buy a lower strike put, out of the money
2. Sell a middle strike put, at the money
3. Sell a middle strike call, at the money (same strike as in step 2)
4. Buy a higher strike call, out of the money (same distance from middle strike as put bought is from middle strike)

You should look for stocks that you believe will stay in a specific range from now through expiration, and we recommend sticking with expiration dates that are within 6 weeks of today's date. It is also important to keep in mind that you can exit an iron butterfly with the same rules that you would use to exit an Iron Condor. In fact, for our Options Trading Systems, we will often trade Iron Butterfly positions in our Iron Condor system---they are really the same thing, it's just that the middle strike prices are shared, giving you a tighter profit range but a higher max profit on the trade.