Iron butterfly strategy

Checked October 2026

An iron butterfly sells the at-the-money call and put, and buys wings further out so the loss has a cap. Backtoast ran the Cboe monthly version with wings 5% away. This version failed our test, losing 3.2% a year over 47 trades.

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Iron butterfly strategy

It's a bet that the S&P 500 sits still for a month. The credit is biggest when the index expires right at the strike you sold, and a move of more than that credit either way is a loss, which the wings stop 5% out. The same tent is what people sell on single stocks.

On the third Friday of each month, Cboe's rule sells a call and a put at the first strike above the index and buys a call above 105% and a put below 95%. All four legs expire the next month and are held to expiry, then the next one opens.

The iron condor strategy is the same trade with the short strikes pulled apart, so it keeps a smaller credit across a wider range, and the short strangle drops the wings altogether.

When it works

An iron butterfly does best in calm months, when implied volatility runs above realized and the S&P 500 ends near the strike it sold, and it did well in the last six months of our run, at +40.99% a trade against −6.21% before. Traders use it for a bigger credit than an iron condor's, with the loss still capped by the wings. Many close it early, at 25% to 50% of the credit, because the profit zone is narrow and gamma risk climbs near expiry.

Origins

Cboe's BFLY sells the strike just above the S&P 500 and buys wings 5% away, and the index methodology is the published version. In a 2021 note Cboe put BFLY's worst drop from a peak over 35 years at 47.1%, against 51% for the S&P 500 and 19% for its iron condor index. The run used SPY in place of SPX, from late 2021 to the end of 2025.

The run is Backtoast's, from 29 October 2026, after costs.