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A summary of the iron butterfly
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Check out this video for a summary of the iron butterfly.
What is the iron butterfly? As we saw in the previous chapter, it is a kind of butterfly spread. Designed to work in low-volatility environments, the iron butterfly strategy is also a market-neutral strategy. It limits the maximum upside that you can enjoy, but it also helps you limit your downside risk. Basically, this four-legged strategy involves two call options and two put options. All the options need to have the same expiration dates. So, how do you set up the iron butterfly strategy? You buy 1 lot of put options at strike price A. You sell 1 lot of put options at strike price B. Then, you sell 1 lot of call options at strike price B. And buy 1 lot of call options at strike price C. The strike prices A, B, and C should be equidistant And in an ascending order in terms of value. For example, if the strike price A is 100, Then the strike price B could be 500, And strike price C should be 900. So, this sums up the details of the iron butterfly strategy. But there’s always more to learn. So, head to the next module in Smart Money to keep the journey going.