Iron Butterfly


System response and access times may vary due to market conditions, system performance, and other factors. The only downside to this strategy occurs if the stock does not fall, in which case the investor loses the premium paid for the put option. Watch how I break down a straddle in easy-to-understand language, from my Advanced Options Course:

The Strategy


An increase in volatility will increase the value of the option you own at the near-the-money strike, while having less effect on the short options at strike B. So the overall value of the iron butterfly will decrease, making it less expensive to close your position. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy You can think of this strategy as simultaneously running a short put spread and a short call spread with the spreads converging at strike B.

When to Run It Typically, investors will use butterfly spreads when anticipating minimal movement on the stock within a specific time frame. Break-even at Expiration There are two break-even points for this play: Strike B plus net credit received.

Strike B minus net credit received. The Sweet Spot You want the stock price to be exactly at strike B at expiration so all four options expire worthless. Maximum Potential Profit Potential profit is limited to the net credit received. Maximum Potential Loss Risk is limited to strike B minus strike A, minus the net credit received when establishing the position.

Ally Invest Margin Requirement Margin requirement is the short call spread requirement or short put spread requirement whichever is greater.

With a little effort, traders can learn how to take advantage of the flexibility and power options offer. With this in mind, we've put together this primer, which should shorten the learning curve and point you in the right direction. This is a very popular strategy because it generates income and reduces some risk of being long stock alone.

The trade-off is that you must be willing to sell your shares at a set price: To execute the strategy, you purchase the underlying stock as you normally would, and simultaneously write or sell a call option on those same shares.

In this example we are using a call option on a stock, which represents shares of stock per call option. For every shares of stock you buy, you simultaneously sell 1 call option against it. It is referred to as a covered call because in the event that a stock rockets higher in price, your short call is covered by the long stock position.

Investors might use this strategy when they have a short-term position in the stock and a neutral opinion on its direction. Check out my Options for Beginners course live trading example below. In this video, I sell a call against my long stock position. The holder of a put option has the right to sell stock at the strike price. Each contract is worth shares. The reason an investor would use this strategy is simply to protect their downside risk when holding a stock.

This strategy functions just like an insurance policy, and establishes a price floor should the stock's price fall sharply. An example of a married put would be if an investor buys shares of stock and buys 1 put option simultaneously.

This strategy is appealing because an investor is protected to the downside should a negative event occur. At the same time, the investor would participate in all of the upside if the stock gains in value. The only downside to this strategy occurs if the stock does not fall, in which case the investor loses the premium paid for the put option. With the long put and long stock positions combined, you can see that as the stock price falls the losses are limited. Yet, the stock participates in upside above the premium spent on the put.

Check out my Options for Beginners course video, where I break down the use of a protective put to insure my gains in a stock. Both call options will have the same expiration and underlying asset. The trade-off when putting on a bull call spread is that your upside is limited, while your premium spent is reduced.

If outright calls are expensive, one way to offset the higher premium is by selling higher strike calls against them.

This is how a bull call spread is constructed. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This strategy is used when the trader is bearish and expects the underlying asset's price to decline.

It offers both limited losses and limited gains. An Alternative To Short Selling. The trade-off when employing a bear put spread is that your upside is limited, but your premium spent is reduced. If outright puts are expensive, one way to offset the high premium is by selling lower strike puts against them. This is how a bear put spread is constructed. Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:.

This strategy is often used by investors after a long position in a stock has experienced substantial gains. This is a neutral trade set-up, meaning that you are protected in the event of falling stock, but with the trade-off of having the potential obligation to sell your long stock at the short call strike. Again, though, the investor should be happy to do so, as they have already experienced gains in the underlying shares.

In my Advanced Options Trading course, you can see me break down the protective collar strategy in easy-to-understand language. This strategy allows the investor to have the opportunity for theoretically unlimited gains, while the maximum loss is limited only to the cost of both options contracts combined.

A Simple Approach to Market Neutral. This strategy becomes profitable when the stock makes a large move in one direction or the other. Watch how I break down a straddle in easy-to-understand language, from my Advanced Options Course:.