Reverse Iron Butterfly
The inverse of the Iron Butterfly — buy the central straddle and sell OTM wings to cheapen it. Long volatility with capped risk and reward.
Profit / Loss Diagram
Reverse Iron Butterfly at expiration
What is this strategy?
The Reverse Iron Butterfly is the mirror image of the traditional Iron Butterfly. Where the Iron Butterfly sells an ATM straddle — short put and short call at the same strike — and buys OTM wings, the Reverse Iron Butterfly does the opposite: it <strong>buys the ATM straddle</strong> — long put and long call at the same strike — and <strong>sells OTM wings</strong> to reduce the cost.
The result: maximum gain if price moves outside the range between the outer strikes, maximum loss if it stays exactly at the centre. It is a <em>long volatility</em> strategy with defined risk — a cheaper alternative to a pure long straddle.
Ideal ahead of catalyst events when implied volatility is very high and a long straddle would cost too much. The Reverse Iron Butterfly captures the expected move for a smaller debit, at the cost of capping the maximum gain.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Put | Lower OTM (A) | 30-45 DTE | -1 SPY 440 Put |
| BUY | 1 Put | ATM (B = centre) | Same expiry | +1 SPY 450 Put |
| BUY | 1 Call | ATM (B, same strike) | Same expiry | +1 SPY 450 Call |
| SELL | 1 Call | Higher OTM (C) | Same expiry | -1 SPY 460 Call |
Example
SPY at $450, 30 DTE. You expect a strong move but do not know the direction. You buy the 450 straddle and sell the 440/460 wings to cheapen it, at the cost of capping the gain.
- Put Sold (440) -1 SPY 440 Put @ $1.50 (credit)
- Put Purchased (450) +1 SPY 450 Put @ $5.00 (debit)
- Call Purchased (450) +1 SPY 450 Call @ $5.00 (debit)
- Call Sold (460) -1 SPY 460 Call @ $1.50 (credit)
- Net Debit $700 — (5.00 + 5.00 − 1.50 − 1.50) × 100; the bare 450 straddle would cost $1,000
- Maximum Gain $300 — (450 − 440) × 100 − 700, with SPY below $440 or above $460
- Maximum Loss $700 — the debit, with SPY exactly at $450 at expiration
- Breakevens $443 (450 − 7.00) and $457 (450 + 7.00)
The Greeks
The symmetric structure gives zero delta at entry.
Long volatility — time works against you.
Benefits from rising implied volatility.
Long gamma — it profits from a fast move.
Position Management
- 01 Pre-Event Entry Open 5–10 days before the expected event to capture IV expansion with limited theta cost.
- 02 Close Immediately Post-Event Close within 30 minutes of the event to bank profits or limit losses.
- 03 Keep Strikes Near Spot For maximum gamma sensitivity, keep the inner strikes near the current price. Wings 5% out of the money are typical.