7. The 1-2-3 Iron Butterfly
The iron butterfly is designed to reduce maximum loss, in exchange for accepting maximum profit. However, it is possible to expand on the butterfly and create a “hedge matrix” so that profits are earned whether the underlying price rises, falls, or remains the same. The offsetting long and short positions in this hedge matrix also keep collateral requirements at a minimum.
The butterfly spread is referred to as a “neutral” strategy, combining a bull and bear spread with the same expiration date. It involves three different strikes and four options. The normal configuration involves two short options at the middle strike, and long options above and below. Either puts or calls can be used to create a butterfly spread. ...
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