Iron Butterfly
Prerequisite strategies: you must have traded the bull put spread and the bear call spread with real money, because an iron butterfly is one of each sharing a strike, and the cash-secured put beneath them. Clear the Level 2 gate first — it needs a margin account, spread permission and a live IV rank source. Next: the iron condor and the long butterfly.
Why this structure exists
A short straddle collects the largest credit in the expiry and pays for it with an obligation in both directions that no retail account should carry. An iron condor is wide and safe and, on a £10-a-point index, collects so little that commission is a visible fraction of it. The iron butterfly sits between them: sell the same at-the-money straddle, then buy a call above and a put below so the worst case is width minus credit rather than whatever the index does.
The naked 9,000 straddle collects £4,015.35 and ties up £13,500 of buying power with no floor at all. Spend £2,008.62 on a 9,250 call and an 8,750 put — exactly half that credit — and you keep £2,006.73, the worst case becomes £493.27, and buying power falls 96.3%: the same £13,500 now funds twenty-seven capped positions instead of one uncapped one. In the 20% overnight gap that costs the straddle £14,765.43, this loses £422.95 and cannot lose more than £493.27.
Why not sell the iron condor instead? Because the condor moves its short strikes 500 points from the money and its credit collapses with them: on the same expiry and the same 250-point wings it collects £506.82 and risks £1,993.18. Four times the capital to collect a quarter of the money, in exchange for lifting the modelled chance of profit from 30.9% to 74.4%. That is the whole decision, and the numbers are below.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Body — call | SELL (credit) | 1 contract = £10 per index point | Nearest listed strike to spot | 30–50 DTE; never a weekly | +0.51 | 203.53 pts = £2,035.29 |
| Body — put | SELL (credit) | 1 contract, same strike | Identical to the call — that is the butterfly | Same expiry | −0.48 | 198.01 pts = £1,980.06 |
| Upper wing | BUY (debit) | 1 contract | Body + the width your 2% cap allows | Same expiry | +0.33 | 104.61 pts = −£1,046.13 |
| Lower wing | BUY (debit) | 1 contract | Body − the same width | Same expiry | −0.29 | 96.25 pts = −£962.49 |
| NET | Net credit | 1 butterfly, 4 legs | 8,750 / 9,000 / 9,000 / 9,250, index 9,000 | 45 days | +0.001 per point | 200.67 pts = £2,006.73 |
Equal wings, one expiry, both short strikes identical: break the symmetry and you have a broken wing butterfly, a skew trade that sits a tier up. Three hard inequalities before the order goes in:
Formulas: max profit = net credit × multiplier − round-trip costs, and only if the index settles exactly on the body strike. Max loss = (wing width − net credit) × multiplier, reached anywhere at or beyond either wing. Breakevens = body ± net credit in points. Buying power = the max loss, because only one side can finish in the money. Check: £493.27 + £1,990.73 + £16.00 = £2,500.00, the width at £10 a point. Modelled chance of any profit at settlement, 30.9%.
Read the dashed line, not the tent. Today the position is almost horizontal: an instant 1% move costs £6.08 at 45 days, £19.88 at 21 and £84.26 at 7. Everything the tent promises and everything it threatens arrives in the last fortnight — the argument for the time stop, and against admiring the diagram.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| IV rank / percentile | IVR ≥ 40 on a 12-month range, with IV percentile ≥ 40. Below 30, no trade | The gate has an arithmetic consequence. At 16% implied the credit is £2,006.73 and the max loss £493.27; at 10% implied the credit falls to £1,741.02 and the max loss rises to £758.98 — 3.0% of a £25,000 account, breaking the 2% cap on the same strikes |
| Term structure | Front month at or above the second month | You are selling the front-month body; a steep contango means selling the cheapest month on the board |
| Days to expiry | 30–50 at entry, closed at 21 | Gamma at the body runs from −£0.18 a point at 45 days to −£2.18 at 7, a 12.0× escalation. The last three weeks are the whole risk and nine tenths of the money |
| Strikes | Body at the nearest listed strike to spot; wings symmetrical, at the width your 2% cap allows | An off-the-money body is a directional trade wearing a neutral name; asymmetric wings are a skew trade |
| Liquidity | Bid-ask ≤ 3% of the structure mid; open interest ≥ 250 on all four legs | 3% each way is £120.40 round-trip against £16.00 of commission — the market maker charges 7.5× the broker |
| Underlying | The cash-settled FTSE 100 index series, not an ICE UK single stock | Four legs need four fills. ICE UK single-stock chains are physically delivered, American style and too thin — see the worked example |
| Event calendar | No MPC decision, US CPI print, index review or futures roll inside the window | A butterfly is short gamma at the money, and an event is the thing that moves the index off your strike |
Do not enter if: IV rank is below 30 — the same strikes then produce a £758.98 maximum loss that no longer fits a £25,000 account at the 2% cap, and the only edge a short-premium trade has is implied volatility exceeding the volatility that follows; the credit is under 60% of the width; the maximum loss at your size exceeds 2% of the account; you hold a cash account or lack spread permission; a scheduled event falls inside the window; or you cannot name the level you expect the index to sit near, because the body strike is that forecast.
Butterfly or condor: the same view, two densities
Both sell a range and buy wings. The butterfly puts both short strikes on the money; the condor moves them out to the 16-delta convention. On the same modelled chain, the same 45-day expiry and the same 250-point wings, the choice is entirely numerical.
| Iron butterfly — this page | Iron condor | |
|---|---|---|
| Legs | Sell 9,000 call + 9,000 put; buy 9,250 call + 8,750 put | Sell 8,500 put + 9,550 call; buy 8,250 put + 9,800 call |
| Short-strike deltas | +0.51 / −0.48 — on the money | −0.14 / +0.15 — the 16-delta convention |
| Net credit | £2,006.73 | £506.82 — 25.3% of it |
| Max loss / buying power | £493.27 | £1,993.18 — 4.04× |
| Max profit, net of £16.00 | £1,990.73 | £490.82 |
| Payoff ratio | 4.04 : 1 | 0.25 : 1 |
| Profit zone at settlement | 8,799.3–9,200.7 — 401 points, 4.5% of the index | 8,449.3–9,600.7 — 1,151 points, 12.8% |
| Modelled chance of any profit | 30.9% | 74.4% |
| Modelled chance of the maximum loss | 62.1% | 12.5% |
| Net vega | −£28.89 a point | −£68.93 a point |
| Gamma at 45 DTE, then at 7 DTE | −£0.18 → −£2.18 (×12.0) | −£0.43 → −£0.12 (×0.29) |
| £16.00 round trip as % of credit | 0.80% | 3.16% |
| Account needed at the 2% cap | £24,663 | £99,659 |
Read the gamma row first, because its direction is the real difference. The condor's short strikes are 500 points away, so its gamma falls into expiry as they go quiet; the butterfly's rises twelvefold, because its short strikes are where the index is. Per £1,000 at risk the butterfly carries £0.37 of gamma against £0.22 and £9.96 a day of theta against £6.12: paid more per pound risked, exposed sooner. The probabilities are settlement probabilities and this page forbids reaching settlement, so read 30.9% as how often the tent alone would have saved you, not as a win rate. And under the model that prices both, the expected result before costs is zero for each — the butterfly is that same zero redistributed into fewer, larger outcomes, and on a £10-a-point index it is the one a £25,000 UK account can hold at the 2% cap while the condor at the same wing width is a £100,000 position.
Credit or debit: the same shape, and why the choice is not about volatility
Every vertical on this site chooses between credit and debit on IV rank. A butterfly does not. Buy the 8,750 call, sell two 9,000 calls and buy the 9,250 call and you have a long call butterfly: the identical tent, paid for rather than sold. The model prices that debit at £480.97 against this structure's £493.27 maximum loss, and the £12.30 between them is exactly 45 days of interest on the £2,500 of width. By put-call parity they are one position, so no IV rank picks between them.
Four things do. Four legs and four bid-asks against three, so execution favours the debit fly on a thin chain. Cash in at entry against cash out. On an American-style single-stock series the credit version can be assigned early on either short leg, while a cash-settled index version of either cannot. And the tax differs in a way nobody mentions: the iron butterfly grants two options for £4,015.35 of day-one proceeds, the long call butterfly grants two 9,000 calls for £4,070.57 — so the debit version books more chargeable gain on day one while paying £480.97 out rather than taking £2,006.73 in. See the tax box.
Greeks at entry and how they evolve
| Greek (net, per contract) | Entry: 45 DTE, 9,000 | 22 DTE, unchanged | 7 DTE, unchanged | +1 SD (9,506) at 22 DTE, IV 14% | −1 SD (8,494) at 22 DTE, IV 20% |
|---|---|---|---|---|---|
| Delta (£ per point) | +£0.01 | +£0.01 | −£0.00 | −£1.08 | +£0.76 |
| Gamma (£/pt per 100 pts) | −£0.18 | −£0.50 | −£2.18 | +£0.27 | +£0.04 |
| Theta (£ per day) | +£4.91 | +£13.95 | +£61.65 | −£6.75 | −£2.07 |
| Vega (£ per vol point) | −£28.89 | −£38.92 | −£54.08 | +£20.88 | +£3.84 |
| Structure mark | 200.67 pts | 181.83 pts | 138.97 pts | 224.85 pts | 221.45 pts |
| Open P&L | £0.00 | +£188.48 | +£616.99 | −£241.73 | −£207.79 |
Black–Scholes at 16% implied volatility unless stated, 4% rates, 3.5% index dividend yield, per one £10-a-point contract. One standard deviation over 45 days is 505.6 points. These inputs reproduce the short straddle page's 9,000 body exactly — 203.53 and 198.01 points — so the two pages reconcile leg for leg.
Gamma decides this trade, and it decides it late. At entry the position is nearly inert: delta a penny a point, gamma −£0.18, theta £4.91 a day against £493.27 of risk, which is why the diagram's dashed line is almost flat. Then the wings start to die. Sitting only 250 points out, they lose their own gamma faster than the body does and the offset they provided disappears: gamma multiplies 12.0× between 45 and 7 days while theta multiplies 12.6×. The income and the danger arrive together and only one of them is visible daily.
The character flip is not at a price level but at the wings, and both stress columns show it: one standard deviation either way and gamma has turned positive, vega positive, theta negative. Past a wing you are no longer renting out time — you own a small, distant long strangle and are paying for it, at a loss the structure has already capped. That is why the correct action outside the wings is to close: there is nothing left to collect, only a floor to sit on.
FTSE 100 at 9,000, implied volatility 16%, IV rank 44, 45 days to run
The ICE FTSE 100 index option is worth £10 per index point (£90,000 of notional at 9,000), is European style so no leg can be exercised early, settles in cash against the Exchange Delivery Settlement Price, ticks in 0.5 points (£5.00), trades 08:00–16:50 London, and on the third Friday trading ceases as soon as reasonably practicable after 10:15 once the expiry value has been determined. Entered Tuesday 1 September 2026 for the October series, last trading day Friday 16 October 2026.
The trade, placed as a single four-leg order: sell 1 × 9,000 call, sell 1 × 9,000 put, buy 1 × 9,250 call, buy 1 × 8,750 put.
Branch A — the target fires on an implied-volatility collapse. Tuesday 22 September 2026, index 9,000, 24 days left, IV down from 16% to 13%.
Branch B — the lower breakeven is tested. Wednesday 16 September 2026, index 8,800, 30 days left, IV up to 19%. The one case where a butterfly has a real adjustment rather than an exit.
Branch C — the index gaps through the wing. Index 8,600 on a Bank of England surprise, 30 days left, IV 22%.
Branch D — held to settlement, EDSP 9,160. Nothing is delivered and nothing is assigned. The 9,000 call settles for cash at 160 points against you and everything else expires worthless: £2,006.73 − £1,600.00 − £16.00 = +£390.73. Settle at 9,250 or below 8,750 and it is −£509.27, the floor. No stamp duty either way, because the contract is cash-settled.
On an ICE UK single stock instead — the teaching point, not a footnote. A BP 500/530/560 iron butterfly at 45 days and 26% implied volatility collects about 22.70p × 1,000 shares = £226.99 against a £300.00 width, so £73.01 of maximum loss. The four premiums total 54.08p, so a 10% bid-ask on each leg costs roughly £54.08 each way — 24% of the credit, and the structure fails its own liquidity gate before the first fill. The series is American style and physically delivered, so one short leg is nearly certain to be assigned: you either buy 1,000 shares for £5,300 and pay £26.50 of SDRT, or you deliver 1,000 you do not own. The iron butterfly is a UK index trade, or it is not a UK trade.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Every premium is modelled from Black–Scholes at the stated inputs rather than taken from a live chain, at a flat 16% across all four strikes; real equity-index chains carry a downside skew that makes the 8,750 put dearer and the credit smaller, and 9,000 is an illustrative round number rather than a quote. Under the model that prices this structure it has no edge at all — the only edge on offer is implied volatility exceeding the volatility that follows, which is what the IV rank gate is trying to buy. Past performance, including any illustrative example shown here, is not a reliable indicator of future results.
Management and adjustment
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Net delta passes ±£0.30 a point | Gamma has quietly made a neutral position directional — around 8,910 or 9,102 at 30 DTE | Roll the untested vertical toward the money for a net credit, and only if total credit then exceeds the inversion width × £10 | Roll the tested side away. That buys back your loss at the worst price and widens the risk |
| A breakeven is touched intraday | The band is 401 points wide; a wick means nothing | Nothing. Judge it on the close | Pay four bid-asks for a level that did not hold |
| Index closes outside a breakeven, >21 DTE | Defensible — the loss is small because the wings still work | Roll the untested vertical in for a credit, once, as one order. Branch B: +£355.57, worst case −£493.27 to −£137.70 | Roll twice. A second roll is a new trade financed by the first one's corpse |
| Index closes outside a wing | At or near the floor; the wings have done their job | CLOSE. −£171.17 in Branch C against a £493.27 maximum | Hold "because it is defined risk". You are paying theta to own a long strangle you did not choose |
| Implied volatility expands after entry | A vega loss of −£28.89 a point, not yet a delta loss. Four points cost £93.50 | Hold if the index is inside the band and the stop is intact; richer options make any later roll pay more | Panic-close on the vega mark alone |
| Implied volatility collapses after entry | The thesis paid early — how a butterfly actually wins | Take the target the day it appears, whatever the DTE. Branch A: +£281.45 at 24 days | Hold for the remaining theta: £12 a day against £493.27 of exposure |
| An event appears inside the window | Short gamma at the money into a gap you were not paid for | CLOSE before the print | Trade it as an IV-crush play without writing the plan down first |
| 21 days to expiry reached | Gamma is about to quadruple again | CLOSE, or roll the whole butterfly to the next monthly for a credit as a fresh decision | Carry it into expiry week for "the last bit". The last bit is 90% of the credit and all of the risk |
ROLL WHEN the index has closed outside a breakeven but inside a wing, more than 21 days remain, the untested vertical can be moved toward the money for a net credit, and the arithmetic passes: total credit collected > inversion width × £10. In Branch B, £2,362.30 against a £2,000.00 inversion. Had that inequality failed, the rolled structure could not show a profit at any settlement level — worth discovering before you place it. ROLL TO the untested side only, in the same expiry, as one order.
DO NOT ROLL for a net debit, ever, and do not manufacture a credit by widening the wings. On the Branch B numbers, rolling out to 500-point wings pays £1,210.81 and looks like the best decision on the screen — while taking the maximum loss from £493.27 to £1,782.45, 3.6 times the number you wrote down and 7.1% of a £25,000 account. That is a bigger trade wearing the word "defence".
THE CORRECT ACTION IS TO CLOSE, NOT ROLL, when the index has closed outside a wing, when the loss reaches £246.63, when 21 days remain, when the roll fails the inversion inequality, or when the only roll available needs wider wings. This is the case the tier below never has to learn: a defined-risk structure sitting on its floor feels safe, so it is tempting to stay. Staying earns nothing and ties up the buying power that would fund the next entry. Defence on a butterfly has a budget, and the budget is the credit.
Exit rules
Read the target and the time stop together, because they conflict on purpose. With the index and volatility unchanged the target arrives at about 18 days — three days after the time stop has closed the position. That is the structure telling you the truth: an iron butterfly is not paid by the calendar. It is paid by an implied-volatility collapse or by the index genuinely sitting on your strike, and if neither happens you leave at 21 days with two fifths of the risk as profit and no complaints. If all four rules are silent, do nothing and check net delta tomorrow.
Margin and broker reality
A cash account will not hold this, and it is the one structure where that deserves a careful answer rather than a slogan. The trade grants two options and a cash account has no mechanism to carry a granted option, so the order is rejected in the preview. There is a genuine exception in the American rulebook, and it happens to describe exactly this position: Cboe's strategy-based margin rules state that certain limited risk spreads, "including butterfly spreads and box spreads", may be carried in a cash account "if the spread is composed of European style, cash settled index options that all expire at the same time" — which a FTSE 100 iron butterfly is, and an American-style, physically-delivered ICE single-stock butterfly is not. Knowing the carve-out is worth something; relying on it is not. Those rules govern American markets rather than an ICE Futures Europe contract, and no UK broker offers spread trading in a cash account. You need a margin account with spread permission, obtained through the broker's appropriateness assessment — not the US "Level 1 to 4" ladder quoted all over the internet, which does not describe UK access. Hargreaves Lansdown, AJ Bell and Trading 212 offer no options at all, so this is an Interactive Brokers or Saxo trade.
The requirement itself is small, knowable and static. Because only one side can finish in the money, the broker holds one side's width less the credit: £493.27, identical to the maximum loss, and it does not move however violent the market gets. Uncovered-option permission is not required, because each short leg is fully covered by a long leg at the same expiry and size. Interactive Brokers margins ICE FTSE 100 series on a risk-based model rather than a published schedule, so your own order preview governs; the width is the ceiling either way. Two rules follow. Place and close all four legs as a single order — legging in leaves you briefly holding a naked short straddle, which the platform will refuse or margin at £13,500. And treat the bid-ask as a margin-equivalent cost: 3% each way is £120.40 round-trip against £16.00 of commission, 7.5 times what the broker charges. On any UK series thinner than the FTSE 100 chain that multiple is what makes the trade impossible rather than merely expensive.
(wing width − credit) × multiplier × contracts ≤ 2% of the account, computed before you look at a single strike, and the credit never counts toward reducing it.Portfolio fit
One contract contributes almost no delta (+£0.01 a point), −£28.89 of vega and +£4.91 a day of theta on £493.27 of buying power — while controlling £90,000 of index notional. That ratio is why the position is sized by risk and never by notional. On a £25,000 account the 2% cap allows exactly one contract, which is no coincidence: the wing width was chosen to make it true.
Four of them across four expiries is a book: £1,973.06 at risk, 7.9% of a £25,000 account and the same 7.9% of buying power, carrying −£115.55 of net vega and +£19.66 a day of theta. Two caps hold it together. Four butterflies on one index are one trade, not four — they share a single risk factor and a volatility event marks all of them down in the same session, so the honest question is whether £1,973.06 leaving at once is survivable. And a short-premium book is short vega everywhere: keep total net vega inside a written number, because it is the exposure you are actually paid to carry and the one nobody measures until it costs them.
What to trade instead
Wider and calmer, at this tier: the iron condor — same four legs, short strikes at 16 delta: £506.82 of credit against £2,006.73, a 74.4% modelled chance of profit against 30.9%, and a £1,993.18 maximum loss needing a £99,659 account at the 2% cap. Take it when you want to be right often and can fund it.
Simpler, from the tier below: a bull put spread alone. One side of the butterfly, one short strike to watch, half the legs and half the bid-ask — and a directional bet rather than a volatility one.
The same shape without the credit: the long call butterfly at the same strikes — £480.97 of debit for an identical tent, three legs instead of four, and a worse day-one tax position. See the credit-or-debit block.
More exposure, a tier up: the short straddle is this position with the wings sold back — £4,015.35 instead of £2,006.73, and no floor: £13,500 of buying power, uncovered-option permission, and a £14,765.43 loss in the gap that costs this structure £422.95. Not an upgrade; a different instrument.
Risk statement
Listed options are complex instruments and a defined-risk structure can still lose its entire defined maximum, quickly and more often than its diagram suggests. This is educational material about mechanics, margin and UK tax treatment, not a recommendation to trade the FTSE 100 or anything else, and it takes no account of your circumstances. Every premium here is modelled rather than quoted, at a flat implied volatility that real chains do not offer. If your trading becomes frequent enough to put the investor-versus-trader boundary in question, that is one for a qualified adviser.