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Iron butterfly

A short straddle wrapped in protective wings — a four-leg, defined-risk bet on the stock staying near one strike.

An iron butterfly is a four-leg options strategy you open for a net credit, built by selling an at-the-money call and put (the body) while buying a further-out call and put (the wings) to cap the risk. It's essentially a short straddle with insurance bolted on, and traders reach for it when they expect a stock to sit still and volatility to cool off.

Say a stock trades at 100. You sell the 100 call and 100 put, then buy the 110 call and 90 put. The premium you collect is your maximum profit, and it only fully materialises if the stock closes exactly at 100 at expiration. Time decay (theta) works in your favour every day the stock idles, while the long wings define a fixed maximum loss.

The classic mistake is treating that fat premium as easy money. The profit zone is narrow, so a modest move against you erases the credit fast. Many traders also open it right before earnings, when the drop in implied volatility they're counting on gets swamped by the actual price gap.

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