Exotic Option Strategies – Long Iron Butterfly

Have you ever wondered what happens if you combine two simple options trade together or if you combined them would they create something new and exotic? Well, the answer is both yes and no.
Some strategies when combines would give you a new strategy – One such strategy is Long Iron Butterfly.

The Simple Long Butterfly
A simple butterfly spread is when a trader would Buy put (or call) A, sell two puts (or calls) at higher strike B, buy put (or call) at equally higher strike C. The pay off is to limit the downside on extreme moves but gain if the market remains rangebound.

 

Long Iron Butterfly
On the other hand a Long Iron Butterfly is when a trader would Buy Straddle, sell Strangle with strike points outside the upper and lower strikerange of the Straddle, e.g. Sell a put (A), buy a put and a call at higher strike (B), sell a call at equally higher strike (C).

 

The payoff here is that the trader expects a move on either sides of the trade and gains on the premium.

 

Interetingly the payoff’s for both the strategies is in opposite directions.

So much for the identical strategy names but for opposite pay off’s!!

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2 thoughts on “Exotic Option Strategies – Long Iron Butterfly”

  1. Satish,
    My instant reaction would be don’t follow my blog if you don’t like what I write.

    Though it would be better if you posted the comment along side the right post and also read the analysis which substantiates the movements https://adityaladia.wordpress.com/2011/04/23/sgdinr-has-anything-really-changed/

    All along the focus has been to show how transferring money to India does not leave a person worse off as compared to holding SGD and waiting for a higher exchange rate.

    Like

  2. I have been following your blog for somw time. You commented on SGD INR rate going down to Rs 30 per dollar- this is when the rate was around 32. Alaas, what happened is the histroy- current rate is 36.5.

    So, I have been an contrarian of your views- whatever you say, opposite position I take…

    Stop writing bullshit, concentrate on your job

    Like

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