Reverse Iron Butterfly
Also known as: Long Iron Butterfly
Expecting a large move away from the current price — the defined-risk version of the long straddle, with wings reducing cost at the expense of capped gains
Risk Profile at a Glance
How to Construct the Reverse Iron Butterfly
- 1.Buy 1 ATM call at strike B
- 2.Buy 1 ATM put at strike B
- 3.Sell 1 call at strike C (higher)
- 4.Sell 1 put at strike A (lower)
- 5.Net debit
Understanding the Reverse Iron Butterfly
The reverse iron butterfly buys the ATM straddle (call and put at the same strike) and sells OTM options on both sides to reduce the net cost. This creates a defined-risk version of the long straddle — you want a large move in either direction, but your maximum profit and loss are both capped. Maximum profit occurs beyond either outer wing (the stock moves far from the middle strike). Maximum loss occurs when the stock pins at the middle strike.
The reverse iron butterfly is often used as a cheaper alternative to a long straddle before binary events, where you expect a significant move but want to reduce the premium at risk. The short wings limit your reward if the stock makes a very large move, but the reduced net debit also reduces the required move to break even. This is a sophisticated trade that requires accurate forecasting of the move magnitude. Traders use it when they believe the implied move priced by the market underestimates the actual move..
When to Use It — EdgeOS Signal Integration
- ✓Use when a bull or bear count approaches 9 — exhaustion signals a large pending move
- ✓Tight extension score (below 0.4) after a long consolidation — breakout imminent
- ✓High VIX with low IV term structure suggests realized volatility may exceed implied
Compare with Similar Strategies
Other Butterflies Strategies
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Frequently Asked Questions
What is the Reverse Iron Butterfly options strategy?
The reverse iron butterfly buys the ATM straddle (call and put at the same strike) and sells OTM options on both sides to reduce the net cost. This creates a defined-risk version of the long straddle — you want a large move in either direction, but your maximum profit and loss are both capped.
When should I use the Reverse Iron Butterfly?
Expecting a large move away from the current price — the defined-risk version of the long straddle, with wings reducing cost at the expense of capped gains
What is the maximum loss on the Reverse Iron Butterfly?
The maximum loss is fully defined at entry: the net debit paid (for debit strategies) or the spread width minus the credit received (for credit spreads). You can never lose more than this amount.
How does the Reverse Iron Butterfly compare to similar strategies?
The Reverse Iron Butterfly is a directional debit strategy. Compared to the Long Straddle (directional, debit), the Reverse Iron Butterfly has limited max risk and limited max reward. Your choice depends on your directional bias, IV environment, and risk tolerance. The TraderValue strategy comparison tool lets you see the exact payoff differences side by side.