An Iron Butterfly is a neutral options strategy that combines a short straddle (selling an at-the-money call and put) with a long strangle (buying an out-of-the-money call and put) with the same expiration date. In crypto options trading, its purpose is to profit from low expected volatility, providing a limited profit potential and defined maximum loss.
Mechanism
The strategy involves four options contracts: selling a call and a put at the same strike price (the body), and buying a call at a higher strike price and a put at a lower strike price (the wings). All options have the same underlying crypto asset and expiration. The net effect is a credit received upfront. The mechanism profits if the underlying crypto asset’s price remains within the two inner strike prices at expiration, with maximum profit at the central strike.
Methodology
The strategic approach requires a market view of minimal price movement in the underlying crypto asset over the options’ lifespan. Traders select strike prices and expiration dates based on their volatility expectations and risk tolerance. The methodology focuses on generating income from time decay (theta) while precisely limiting potential losses, making it suitable for range-bound or low-volatility environments within crypto options markets.
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