Iron butterflies explained
An iron butterfly sells a call and a put at the same at-the-money strike and buys a further call and put as wings. It is the highest-credit defined-risk structure on any chain, because the body is where the time value peaks. It is also the one that finishes in the loss zone more often than not, and the two facts are the same fact.
Take an iron condor and slide both short strikes together until they meet at the money. That is a butterfly. Everything about it follows from that one move.
The trade
DKNG at $38.40, September 19, 45 days out. The body goes at $38, the nearest strike to the stock.
| Leg | Action | Price | Cash |
|---|---|---|---|
| $34 put | buy 1 | $0.64 | -$64 |
| $38 put | sell 1 | $1.76 | +$176 |
| $38 call | sell 1 | $2.36 | +$236 |
| $42 call | buy 1 | $0.73 | -$73 |
| Net | $2.75 | +$275 |
- Credit: $275, which is five times what the condor on the same chain collected.
- Width: $4 on each side.
- Maximum loss: $400 minus $275 = $125.
- Break-evens: $35.25 and $40.75.
- Return on risk: 220 percent in 45 days.
- Maximum profit: $275, and only if DKNG closes at exactly $38.
A structure that pays $275 to risk $125 sounds like an error somewhere. It is not. Look at what it takes to collect it.
Where it ends up
| DKNG at expiry | Result | P and L | Odds |
|---|---|---|---|
| Below $34 | full width against you | -$125 | 19.1% |
| $34 to $35.25 | losing | -$1 to -$125 | 8.1% |
| $35.25 to $38 | profitable, rising toward the strike | +$1 to +$275 | 20.8% |
| $38 to $40.75 | profitable, falling away from the strike | +$275 to +$1 | 20.0% |
| $40.75 to $42 | losing | -$1 to -$125 | 7.5% |
| Above $42 | full width against you | -$125 | 24.4% |
Add the two middle rows. 40.8 percent. That is how often this trade finishes anywhere in profit at all.
It loses 59.2 percent of the time. That number goes on the page rather than in a footnote, because every description of an iron butterfly leads with the 220 percent return on risk and most of them never get to this line.
The max profit is a point, not a zone
The $275 headline needs DKNG to close at exactly $38.00 on September 19. Not near it. At it.
The odds of finishing within fifty cents of $38 are 7.8 percent. Within a quarter, under 4 percent. The maximum profit on an iron butterfly is a number you will collect approximately never, and quoting a return on risk that assumes it is the single most misleading thing said about this structure.
The realistic version: you finish somewhere in the profit zone about two times in five, usually collecting a fraction of the credit, and you take the $125 the rest of the time. Multiply it out and the expected value lands where it always does, at zero, which is what a fairly priced set of contracts means. Cluster H has the general argument.
Butterfly against condor, same chain, same day
| Iron butterfly, $38 body | Iron condor, $34 and $43 | |
|---|---|---|
| Credit | $275 | $55 |
| Maximum loss | $125 | $145 |
| Return on risk | 220% | 37.9% |
| Odds of any profit | 40.8% | 67.2% |
| Odds of maximum loss | 43.5% | 20.7% |
| Profit zone width | $5.50 | $10.10 |
Neither column is better. They are the same expected value arranged differently: the butterfly wins rarely and large, the condor wins often and small. Which one suits you is a question about how you behave after four losers in a row, not a question about the arithmetic.
What is worth noticing is the maximum loss row. The butterfly's is smaller, because the credit is so large relative to the wing width. On a high-volatility name with wide wings, a butterfly can be the lower-risk structure in dollars and the higher-risk one in frequency at the same time.
The two mechanical problems
The body is at the money, so gamma is at its maximum. The $38 strike is where gamma peaks on the whole chain, and you are short two contracts of it. That means the position's delta swings hard on small moves and the profit and loss is jumpy in the last two weeks in a way the condor's is not. Holding one to expiry is genuinely uncomfortable.
The short legs are at the money into expiry, which is where assignment lives. These are American-style contracts. A short at-the-money put a week from expiry is the textbook early assignment candidate once its remaining time value gets thin, and if DKNG finishes anywhere near $38 you are into pin risk on two contracts at once. One gets exercised, the other does not, and you find out on Saturday whether you are long 100 shares or short them.
That second problem is the practical reason most people who run butterflies close them before expiry rather than letting them settle, which means crossing four spreads to get out and giving up part of whatever you made.
When it makes sense
Narrowly. A butterfly is a bet that the stock stays close to one price and that options are currently overpriced relative to that. It wants high implied volatility on the way in and a dead tape afterwards.
It is not an income strategy, it is not passive, and it has nothing to do with the two trades this site is built around. A covered call charges rent on shares you own. A cash-secured put pays you to bid for shares you want. A butterfly has no shares in it at any point and no story about the company at all.
If you are running one, size it by the $125 and not by the contract count, and read the 59.2 percent loss rate as the base case rather than the tail.
Spreads need a higher options approval level than covered calls or cash-secured puts at most brokers, and they are multi-leg orders: two or four legs to fill on the way in and the same on the way out. Every price here is an illustrative worked example computed off one chain, not a quote.
OptionsKing scores every candidate strike on a deterministic 0 to 100 scale, blends that score with the return on the capital the trade ties up, and shows you the highest-ranked handful. There is no minimum score. How it works covers what the ranking does and does not tell you.
Questions people actually ask
What is an iron butterfly?
A short call and a short put at the same at-the-money strike, with a long call and a long put further out as wings. It collects the largest credit of any defined-risk structure on a chain because the body sits where time value peaks.
How often does an iron butterfly make money?
On the worked trade, 40.8 percent of the time. It finishes in the loss zone 59.2 percent of the time and takes the full $125 maximum loss 43.5 percent of the time. The payoff is larger when it works, so the expected value still lands near zero.
Can I really make 220 percent on an iron butterfly?
Only if the stock closes at exactly the body strike. The odds of finishing within fifty cents of it are 7.8 percent. Quoting the maximum return on risk assumes an outcome you will almost never see.
Is an iron butterfly better than an iron condor?
Neither is better. On the same chain the butterfly pays $275 and wins 40.8 percent of the time; the condor pays $55 and wins 67.2 percent. Same expected value, opposite shapes, and the choice is about how you handle a run of losses.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read the Learn hub for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.