Strategy · 5 min read
The Iron Fly (Iron Butterfly) strategy
An Iron Fly (or Iron Butterfly) sells an at-the-money (ATM) call and put — a short straddle — and buys further-OTM call and put wings to cap the risk. It collects the maximum premium of any defined-risk structure, but profits only in a narrow band around the strike: a strong short-volatility bet that the underlying pins a level.
Structure
Four legs, both shorts at the same ATM strike:
- Sell ATM Call + Sell ATM Put (the short straddle — maximum premium)
- Buy OTM Call + Buy OTM Put (the wings — cap the loss on each side)
Risk and reward
Max profit (the net credit) is realised only if the underlying expires right at the strike. Because the shorts are ATM, premium decays fastest here — great when the market is calm, painful when it trends. The bought wings make the maximum loss known up front, the key advantage over a naked short straddle.
Iron Fly vs Iron Condor
The Iron Fly is the Iron Condor with the shorts pulled in to ATM: more premium, narrower profit range. On KXalgo both are entry types on the same bot — switch between IC and IF and backtest each to compare.
FAQ
Is the Iron Fly riskier than the Iron Condor?
Both are defined-risk. The Iron Fly collects more but has a narrower profit range, so it needs the underlying to stay close to the strike.
When does the Iron Fly work best?
In calm, range-bound or pinning markets with elevated premium — it is a strong short-volatility position.
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