Iron Butterfly (and butterflies)
[April 2021 Update: We've added Call butterflies and put butterflies strategies as well. The P/L profile is identical, and so are the filters. The difference is what options we use to build the strategy: See this article for more information. Usually, for butterflies far from the money, you'd choose to use calls for above the last price and puts for below the last price. This is because the liquidity and bid/ask spread will usually be better.]

Iron Butterfly is an options strategy with limited (and often low) loss and high profits at expiration. It is best used when the trader has a good idea of the asset direction, duration, and magnitude and wants to make a bet capitalizing on that projection.

Option Samurai's scanner allows you to find the optimal butterfly using your criteria, such as: Probability of profit, expected value, scenario engine, technical analysis, profit ratio, shape, and more. All Samurai's features are working with this strategy.

Butterfly filters:

Samurai has 100s of filters for scanning, all of them working with this strategy. Here we will focus on some filters that are unique and useful for this strategy:

  • Butterfly shape: The 'shape' filter refers to how the option strategy looks like on a P/L chart (profit and loss chart). The possible options are:
    Any - We will scan for the optimal trade, regardless of the shape. Since there are tens-of-millions of premutation in an average scan, it will probably be a broken-wing butterfly (it will have a different loss profile for the calls and puts).
    Balanced - We will scan all possible strategies, but the max loss will be identical for the calls and puts.
    Riskless up - This is a broken wing butterfly that can not lose on the upside.
    Riskless down - This is a broken wing butterfly that can not lose on the downside.
  • Short call delta: This filter will control where the butterfly's middle will be (the sold options). This filter will pick the closest strike available to the delta.
    Profit ratio: It is calculated as the max profit divided by the max loss. It is the return on the risk. It is useful to sort accordingly to see the trades with the best available ratio.
  • Profit range: There are two filters you can use to control how wide the butterfly's profit range will be. You can set it up as a percentage or as an ATR (Average True Range). You can read more here.
  • Max loss: This controls what the maximum loss of the trade will be.

How to control the butterflies:

By default, the scanner will scan tens of millions of permutations and look for the optimal butterfly that fits your criteria. In case you want to fine-tune the direction and area of the butterfly, you can use the following filters:
  • Short call delta: This filter will force the sold options to be the strike with the closest delta to the value you specify. For example:
    If you want the butterfly to be ITM, you can set it to be 50 deltas.
    If you want it to be above the current price, you can set it as 40 deltas.
    If you want it to be below the current price, you can set it as 60 deltas.
  • Scenario engine: You can set the scenario engine to your outlook and then sort the PL column descending (highest first). This will force the butterfly to the location of your outlook. For example, if you set the scenario to be a 5% increase or one standard deviation increase, the scanner will maximize the profit there.


Bullish Riskless up Butterflies:
You can use the butterfly's advantage (high-profit ratio, low risk) to make a bullish directional bet. If you are correct, you will have a high return on the risk. And if you are wrong, the loss will be limited and small compared to the potential gains. You can use other filters to find trades with bullish potentials, such as: Stock score, technical analysis (oversold, for example), fundamentals (high growth), and more.

You can see this scan to help you get started: Riskless Up Butterflies predefined scan. (you need to be logged in)

Bearish Riskless down Butterflies:
Butterflies can be very powerful for bearish trades and hedging your overall portfolio. Since the markets tend to move up over long periods, it is hard to be profitable when trading bearish trades. Using the butterfly's advantages (high profit-ratio, low risk), you can make small bets that will yield a high return if you are right but won't create critical damage if you are wrong.
You can use this scan to help you find hedging trades or bearish trades if your outlook for the future is price decrease. Similar to all scans, you can use all other filters to help you fine-tune the opportunity, such as: stock score, technical analysis (over-bought for long periods), and more.

You can see this scan to help you get started: Riskless Down Butterflies predefined scan. (You need to be logged in).

Read more:

Read our guide about iron butterflies in our blog
Article about scenario engine in KB
All Unique features: KB
Go to the Options scanner

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