An options strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) strangle. An iron butterfly contains four options; it is equivalent to a regular butterfly spread that contains only three options.
For example, a short iron butterfly might include:
- Buy 1 XYZ May 60 call and 1 May 60 put
- Write 1 XYZ May 65 call and 1 XYZ May 55 put