An Iron Butterfly sells one ATM straddle and buys OTM wings (one call, one put). It collects the largest possible credit for a defined-risk structure but profits only in a tight band around the ATM strike. Max loss is wing width minus credit. It is more aggressive than a condor: bigger credit, narrower win zone.
Use near expiry when IV rank is high and the model expects range-bound action with max-pain as a magnet. The filter blocks it when VIX z exceeds 2 or max-pain distance is tiny (pin uncertainty). Size small; the structure is short gamma and short vega.
Q: What is an Iron Butterfly?
A: Short ATM straddle plus long OTM wings; max credit, narrow zone.
Q: Iron Butterfly vs Iron Condor?
A: Butterfly credits more but wins only in a tighter band.
Q: Why is it risky?
A: Short gamma and vega; a move away from ATM loses quickly.
Q: When to avoid it?
A: High VIX or unclear max-pain distance near expiry.
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By Shakti Tiwari · Options AI research pillar. NISM XII certified. Educational only, not investment advice; verify before acting.