# Iron Butterfly: Payoff, Breakevens, and Expiration Risk

Learn how a short iron butterfly combines a short straddle with protective wings, how to calculate maximum profit and loss, and why pin and assignment risk matter.

Canonical: https://wiki.fcontext.com/options/iron-butterfly/
Fact checked: 2026-07-22

> For educational purposes only; not investment advice.

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## Direct answer

A **short iron butterfly** combines a short call and short put at one center strike with a lower-strike long put and higher-strike long call, all sharing one expiry. It is normally opened for a net credit and has defined expiration loss. Maximum profit requires the underlying to finish at the center strike; profit falls quickly in either direction, making the structure more concentrated than an iron condor. The long wings cap tail loss but do not eliminate execution, early-assignment, or expiration risk.

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## Four-leg structure and payoff

Using lower strike `K_L`, center `K_M`, upper strike `K_U`, and credit `c` per share, the four legs are: buy `K_L` put, sell `K_M` put, sell `K_M` call, and buy `K_U` call. For equal-width wings `w`, maximum profit is `c × multiplier`, maximum loss is `(w-c) × multiplier`, and breakevens are `K_M-c` and `K_M+c`.

If wings have unequal widths, calculate each side separately: downside loss is `(K_M-K_L-c)×multiplier` and upside loss is `(K_U-K_M-c)×multiplier`. A credit is cash received at entry, not earned profit. Before expiration, changing spot, volatility, time, skew, and Bid/Ask prices determine the cost to close.

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## The 90/100/110 example

With the underlying near `$100` and one expiry: buy the `$90` put, sell the `$100` put, sell the `$100` call, and buy the `$110` call. If the package collects `$4.00` and the multiplier is `100`:

- Maximum profit: `$4 × 100 = $400` at an expiration price of exactly `$100`.
- Maximum loss: `($10-$4) × 100 = $600` below `$90` or above `$110`.
- Lower breakeven: `$100-$4 = $96`.
- Upper breakeven: `$100+$4 = $104`.

At `$98` expiration, the short put is worth `$2` and profit before fees is `($4-$2)×100 = $200`. At `$107`, the short call spread costs `$7` and loss is `($7-$4)×100 = $300`. These are expiration outcomes, not marks during the holding period.

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## Trade management and risks

- Enter and evaluate the four legs as one package; legging creates temporary naked or directional exposure.
- Use executable package Bid/Ask prices, contract multipliers, fees, and quantities rather than adding ideal midpoints.
- Compare the credit with each wing width and reject any platform payoff that assumes symmetry when strikes are asymmetric.
- Stress price, implied volatility, skew, time, and widening spreads; the position is often short volatility and positive Theta near the center, but Greeks change sharply.
- Check earnings, macro events, ex-dividend dates, and borrow conditions before choosing the expiry.
- Short American-style legs can be assigned early, breaking the intended four-leg structure and creating stock, margin, or dividend obligations.
- Near the center strike at expiration, small after-hours moves can change which short leg is exercised; this is pin risk.
- Do not assume long wings automatically offset assignment in time. Exercise and assignment processing can occur separately.
- Define profit-taking, maximum acceptable loss, adjustment, and exit time before expiration week.
- Verify broker exercise cutoffs and buying power; closing before expiration may reduce operational uncertainty but still depends on liquidity.

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## Common misconceptions

- “Defined risk means low risk.” The maximum loss can still exceed the credit and occur quickly.
- “Maximum profit is likely because the stock only needs to stay flat.” It must finish very near one exact strike.
- “The entry credit is immediately earned.” Closing the position requires buying back its remaining value.
- “Iron butterfly and iron condor are the same.” The butterfly's short call and put share a strike, creating a narrower peak.
- “Positive Theta guarantees daily gains.” Price and volatility moves can overwhelm decay, and Theta is not constant.
- “Long wings eliminate assignment risk.” They cap expiration payoff but do not prevent early assignment or account disruption.
- “The payoff chart is enough.” It usually shows expiration value, not path-dependent marks and execution costs.

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## Related topics

- [Butterfly spread](/options/butterfly-spread/)
- [Credit spread](/options/credit-spread/)
- [Vertical spread](/options/vertical-spread/)
- [Assignment risk](/options/assignment-risk/)

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## Primary sources

- [Options Industry Council: Iron Butterfly Spread](https://www.optionseducation.org/strategies/all-strategies/iron-butterfly-spread)
- [OCC: Characteristics and Risks of Standardized Options](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)
- [FINRA: Options](https://www.finra.org/investors/investing/investment-products/options)
- [Investor.gov: Options](https://www.investor.gov/introduction-investing/investing-basics/investment-products/options)