Iron Butterfly options trading strategy in stock market technical analysis #shorts #krinu

Iron Butterfly is an options trading strategy here the investor constructs this strategy with these four contracts

Leg -1 :Sells an ATM Put option and receives the premium
Leg -2 :Buys an OTM Put option and Pays the premium
Leg -3 :Sells an ATM Call option and receives the premium
Leg -4 :Buys an OTM Call option and Pays the premium

The range he specifies must be almost equal above and below to make it a perfect Spread like a Butterfly wing span

Case :1

now if Nifty trades above the Break even of Leg-4 at the time of expiry , a limited upward movement ,

Here in this case he earns a profit from

Leg-4 (the OTM Call option he bought)
Leg-1 (ATM Put option he sold)

In this same case his Loss:

Leg-2 (OTM Put option he bought)
Leg-3 (ATM Call option he sold)

Here this gain can offset the loss so the risk of huge loss is mitigated

Case:2

If nifty trades below the break even of Leg-2 at the time of expiry , a limited downward movement

He earns a Profit from

Leg-2 (OTM Put option he bought)
Leg-3 (ATM Call option he sold)

In this same case his loss:

Leg-4 (the OTM Call option he bought)
Leg-1 (ATM Put option he sold)

Case:3

If nifty trades between the range of Leg-3 and Leg-1 at expiry, almost neutral or sideways

He earns a Profit from :

Leg-3 (ATM Call option he sold)
Leg-1 (ATM Put option he sold)

in this case he earns a maximum profit of Rs.41 /share since the other two options (Leg-1 & Leg-4) he bought by paying the premium is his loss .

Traders use this strategy to earn a regular but a minimal premium income at times of a neutral or side ways market or times when the volatility in the market is low (which means there is no drastic swing expected) further the upper and lower limit (the options contracts) serves as an shield or a perfect hedge in adverse market movements and can minimize the loss..

Iron Butterfly is almost similar to a Butterfly spread strategy the difference here is the way this strategy uses calls and puts , Investors use this strategy when volatility in a stock or indices (Nifty) is low; to generate some income and a high probability of a limited gain (in our example we can see the investor makes a maximum profit which is the total Net premium he received ; when the market trades within the range of Leg-1 & Leg-3.)
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