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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Short Iron Butterfly

Risk: limited
Reward: limited

General Description
Entering a short iron butterfly entails selling (1) put at a lower strike, buying (1) put at a middle strike, buying (1) call at the same middle strike and selling (1) call at a higher strike (same expiration month, strikes are equal distance). It's essentially a combination of a lower strike bear put spread and a higher strike bull call spread, and it's similar to a short iron butterfly except the long puts use the same strike.

(draw a short iron butterfly risk diagram here)

The Thinking
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. You employ a lower strike bear put spread, which achieves max profitability when the underlying drops (although profitability is capped) and a higher strike bull call spread, which achieves max profitability when the underlying rallies (although profitability is capped). If you are correct, if the stock moves big (preferably above the upper strike or below the lower strike) you'll profit.

Example
XYZ is at $55.00, and your analysis says a big move is coming (earnings or some other big announcement). You buy (1) 55 put for $3.00 and sell (1) 50 put for $1.00. Then you buy (1) 55 call for $3.00 and sell (1) 60 call for $1.00. The net debit is $4.00.

Above the highest strike, max profitability is achieved. The puts are out-of-the-money and expire worthless, and the calls are in-the-money can cancel each other out. As an example, at $65, the 50 put will be worthless ($1.00 profit), the 55 put will be worthless ($3.00 loss), the 55 call will be $10.00 ($7.00 profit) and the $60 call will be worth $5.00 ($4.00 loss). The net of this is a $1.00 profit.

Below the lowest strike, max profitability is also achieved. The calls are out-of-the-money and expire worthless, and the puts are in-the-money can cancel each other out. As an example, at $45, the 50 put will be worth $5.00 ($4.00 loss), the 55 put will be worth $10 ($7.00 profit), the 55 call will be worthless ($3.00 loss) and the $60 call will be worth ($1.00 profit). The net of this is a $1.00 profit.

At $55, your max loss occurs. All calls and puts expire worthless, and your loss is equal to the net debit charged for initiating the trade. At $55, both the 50 put and 60 call will be worthless ($1.00 profit each) and the 55 call and put will be worthless ($3.00 loss each). The net of this is a $4.00 loss.

The PL chart below graphically shows where this trade will be profitable and at a loss.