Short Iron Butterfly Option Screener

Hi, and welcome to the Options Learning Center. I'm going to show you how to trade short iron butterflies and how to use Barchart to get the most out of the strategy.

What Is A Short Iron Butterfly Spread?

The short iron butterfly is a neutral options strategy that requires four options, two of which are at the same strike price, on the same underlying asset, and with the same expiration date. The strategy works best if you anticipate the asset will trade with low volatility until expiration.

For that reason, you could consider trading a short iron butterfly after a big event, such as earnings or a news release—after the volatility has already baked into the underlying securities' price.

The maximum profit condition occurs if the asset's price ends exactly at the middle strike price, which is rather unlikely, however, you will make a profit so long as the underlying trades between the breakeven points at expiration.

Short Iron Butterfly Spread Options Strategy:

• Combines Four Options
• Same Underlying Asset and Expiration
• Profit if the Price Ends at the Short Strike
• Result: Bull Put & Bear Call Spread
  
• Max Profit: Net Credit
• Loss: Underlying Asset Trades Beyond Long Strikes

To set up the trade, you'll buy one put option, then sell a put and a call at a higher strike, and then buy one call at an even higher strike. All options will have the same underlying asset and expiration date, with the distance between the outer and middle strike prices equal on both sides.

Short Iron Butterfly

• Buy One Put (Lowest Strike Price)
• Sell One Put and One Call (Higher Strike Price)
• Buy One Call (Highest Strike Price)

The result is a bull put and bear call resulting in a net credit.

The goal of a short iron butterfly is for the underlying asset's price to trade between the breakeven points at expiration. If that happens, you'll earn a profit. Maximum profit, however, will occur if all the options expire worthless, and that will happen if the underlying asset trades at precisely the middle strike price at expiration. However, the chances of the underlying ending exactly in the middle are low, so that's why traders are often happy even if the underlying ends somewhere around it.

The maximum profit on a short iron butterfly is the net credit received. The maximum loss is the difference between the middle strike and either of the outer strike prices, minus the net credit.

Trade Examples

Can you imagine searching through thousands of stocks to find the perfect short iron butterfly trade? That would take a very long time. Luckily, you don't have to. With Barchart's screening tools, you can get results in as fast as a few seconds. Let me show you how.

Screening The Market For Short Iron Butterfly Trades

To access the Short Iron Butterfly screener, go to Barchart.com, click on the Options tab, and then click on Short Iron Butterfly Screener. You'll be brought to a results page. These trades represent results based on a default filter that gives you a decent amount of results while balancing risk and reward. It's a great starting point for most investors.

You can rearrange the column headers from highest to lowest or in reverse by clicking on them. Now, as I said, these are already a good set of trades that balance risk and reward. But if you'd like to adjust the search parameters, you can click "Set Filters" at the top, which will take you to the options screener page.

On the screener page, type your desired filter into the "Add Filter" field and click "Add." If you're unsure what to add, open the dropdown to select an option. Available filters include stock and options data, such as options analysis, underlying prices, trade details, company earnings, and technicals—everything you need to refine your trade is here.

For now, I'll just use the defaults, but then I'll adjust some of the selections. First, I'll click on ETF in Security type so ETFs will appear on the results. Then, I'll scroll all the way down to the probability of loss, which is arguably the most essential filter, since this predicts the chance of the trade ending at a loss, even for a cent. Short iron butterflies typically have around a 50/50 profit, so I'll set that filter to look for trades that have less than 50% probability of loss - for better chances of profit.

But before I explain the trade, let me show you how you can save your screener to reuse it later. Just click Save Screener near the top right, then type in the screener's name. At the bottom, you can also have Barchart email you at a specified time with your trades. It's that easy.

Now that's done, let's move on to the trade example.

According to the trade, you can create a short iron butterfly spread on the SPY, with the ETF currently trading at $603.91. Here's how this trade works: you buy the $555-strike put, paying $1.41 per share. Then, you sell the $590-strike put, collecting a premium of $4.30 per share. Then, you sell the $590-strike call, collecting a premium of $21.18 per share, and buy the $625-strike call, paying $2.16 per share.

This trade setup results in a total net credit of $21.91 per share, or $2,191 total per contract. Your maximum loss on the trade is $13.09 per share. All options expire on January 17, 2025, which, from the time of the screen, is 44 days until expiration. The trade also has a 42.4% probability of loss, with a risk-to-reward ratio of 0.60 to 1.

Now, to quickly figure out if my trade is profitable, I find it's best to know the breakeven points on the upside and downside. To calculate these yourself, subtract the total credit from the short put strike to get the lower breakeven price and add the total credit to the short call strike to get the upper breakeven. This gives you breakeven points of $568.09 on the lower end and $611.91 on the upper end.

Breakeven Calculation

• Lower Breakeven: Short Put Strike - Total Credit
• Upper Breakeven: Short Call Strike + Total Credit

Now that we have the details, let's discuss how the trade can go:

Profit Scenario

If the SPY trades at exactly $590 at expiration, you get the maximum profit for the trade. To calculate the maximum profit, take the premium received and subtract the premium paid. For this trade, it's $21.91 per share or $2,191 per contract. But, as I said, the chances of that happening are low. As long as the SPY trades between the breakeven points, you'll make a profit.

Net Debit: ($4.30 + $21.18) - ($1.41 + $2.16)
Maximum Profit: $25.48 - $3.57 = $21.91 x 100 = $2,191

Loss Scenario

On the other hand, if the price of the SPY trades beyond the long strikes at expiration, the trade will end at a maximum loss. To calculate the maximum loss, take the width of the spread or the difference between the middle strike and either of the outer strikes, then subtract the credit received at the start of the trade.

Width of the Spread: $625 - 590 = $35
Net Credit: $21.91
Maximum Loss: $35 - $21.91 = $13.09 x 100 = $1,309

Profit/Loss Across Different Price Points

Here's a profit/loss chart for different prices at expiration to give you a better idea of how the trade works.

As you can see, the trade will result in a maximum profit if the SPY trades at exactly $590 at expiration. This is the middle strike. But, don't forget, there's a profit range between the breakeven prices. And of course, losses begin beyond the breakeven points, with maximum losses happening if the ETF trades beyond either of the the long strikes.

Screening For Short Iron Butterflies For Specific Assets

So that's screening the entire market potential short iron butterfly trades. But what about if you have a specific stock or ETF in mind? That's also easy. Let me show you how.

All you need to do is go to the stock or asset's Price Overview page on Barchart.com. Once there, navigate to the left and look for Butterfly spreads. Then, click the short iron butterfly tab to see the trade search results.

You can click on the dropdown to change the expiration dates, change trade legs, rearrange each column, or click the screen button and then the set filter tab to access the option screener page for a more granular search. It's really that easy.

Closing Your Positions Before Expiration

It is always a good idea to close your positions right before expiration when using any strategy that requires writing or selling options. For this example, you have two short positions in this trade, and if either is in the money by expiration, the option will be automatically exercised, or, in your perspective, you'll be assigned.

• Strategy Includes Two Short Positions
• ITM Option(s) Will Be Exercised at Expiration

If any of the short options gets assigned, you're either obligated to buy 100 shares of the underlying for every put you wrote, or you'll need to sell 100 shares for every call you sold. If the options are in the money, these positions may require significant capital for the assignment. So, you might want to set an alert, for example, if the stock goes above or below a certain price, send you an email.

• Assignment Means Buying 100 Shares
• Adverse Market Conditions Could Lead to a Loss

You can also sell the relevant long positions to capture any remaining value, which might mitigate some of your losses. But keep an eye out for trading fees- if they exceed the options premium, it won't be worth it.

• Sell Long Options to Capture Any Remaining Value
• Watch Out for Trading Fees

Pros and Cons of Short Iron Butterfly Spreads

Like many option spreads, the short iron butterfly has a defined risk and reward profile, so you know what the potential profits and losses are upfront. The trade also has the advantage of benefiting from time decay. It works well during times when the market is neutral.

Pros:

• Defined Risk/Reward Profile
• Neutral Strategy
• Benefits from Time Decay

That said, the short iron butterfly has limited profit potential and is very vulnerable to volatility. Its multiple trade legs also require complex management, and achieving maximum profit is very difficult. It's rare to find trades with more than a 50% probability of profit. But again, the goal isn't to achieve the maximum profit condition, rather, it's to create a profit no matter how little.

Cons:

• Limited Profit Potential
• Vulnerable to Volatility
• Complex Strategy
• Decreased Chance of Maximum Profit

Conclusion

The short iron butterfly is best used when you expect an asset to trade within a specific range at expiration. This is best used after large events that lead to low volatility or generally neutral trading conditions. To maximize your chances of profiting, you should use every resource at your disposal, like option screeners and trading guides like these.

If you need more information, visit the the Barchart Options Learning Center where you can find more about other option strategies broken down into their working parts.