Article What is an Iron Butterfly Option Strategy?

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Options provide investors with ways to make money that cannot be duplicated with conventional securities such as stocks or bonds. And not all types of option trading are high risk ventures; there are many ways to limit potential losses. One of these is by using an iron butterfly strategy that sets a definite dollar limit on the amounts that the investor can either gain or lose. It’s not as complex as it sounds.
What Is An Iron Butterfly? The iron butterfly strategy is a member of a specific group of option strategies known as “wingspreads” because each strategy is named after a flying creature such as a butterfly or condor. The iron butterfly strategy is created by combining a bear call spread with a bull put spread with an identical expiration date that converges at a middle strike price. A short call and put are both sold at the middle strike price, which forms the “body” of the butterfly, and a call and put are purchased above and below the middle strike price...

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Buying protection can be costly

What the reader needs to recognise is that buying options to protect the down and/or up side reduces the potential gain and the breakeven points of the trade. When I first started options trading, I only wrote iron condors and butterflies. It wasn't until the 11 month that I finally got around to drawing a graph of what my trades looked like that I realised that one month's loss could wipe out a year's gain. Sure enough, the next month I took a loss down at my protection and that wiped out all the previous 11 positive month's of trading. That was about 18 years ago and since then I have never bought options for protection. OK, I've taken my fair few months of hits, but with rolling and selling more OTM puts and or calls, I'm more than happy with my trading performance which avoids the reduction in profit and break even points afforded by buying protection.
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