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A four-leg options strategy that collects the largest possible defined-risk credit for a bet that the underlying stays close to a single price — the capped-risk version of a Short Straddle, in the same way an Iron Condor is the capped-risk version of a Short Strangle.

An Iron Butterfly combines a Short Straddle (selling a call and a put at the same strike) with two protective long options further out on each side — a long put below and a long call above, at equal distance. It's built exactly like an Iron Condor, except the two short strikes are merged into one: instead of a flat profit zone between two short strikes, there's a single profit peak at the shared strike, tapering off in both directions.

The two short legs (both at the same strike) generate the premium. The two long "wings" — usually placed at equal distance from the shared strike — cap the risk on each side, exactly the role they play in an Iron Condor. The difference is entirely in where the short legs sit: together at one strike here, apart at two strikes there.

Because both short options share a strike, the maximum profit is a single point rather than a range:

1. Exactly at the shared strike — maximum profit. Both short options expire worthless, and you keep the full credit. Unlike an Iron Condor, there is no flat zone around this point — moving even slightly away starts reducing profit immediately.
2. Between the strike and either breakeven — profit shrinks steadily as one side of the position gains intrinsic value.
3. Between either breakeven and the corresponding wing — the position is now in a loss, growing as the underlying moves further from the strike.
4. Beyond either wing — maximum loss, fully capped and flat, mirroring the same shape an Iron Condor has beyond its own long strikes.

This narrower peak (versus an Iron Condor's flatter plateau) is the trade-off for a larger net credit — at-the-money options carry more premium than the out-of-the-money ones an Iron Condor sells, the same relationship that makes a Short Straddle collect more than a Short Strangle.

An Iron Butterfly fits a view that the underlying will be unusually pinned near a specific level — a tighter, higher-conviction version of the range-bound view an Iron Condor expresses. It's a natural choice when you want a Short Straddle's larger premium but aren't comfortable with its undefined risk, and are willing to accept a narrower profitable range in exchange for a known worst case.

Suppose Nifty is trading at 24,000 with a weekly expiry coming up, and lot size is 65. You expect it to stay very close to this level, but want a known worst case.

1. Confirm the setup. You expect Nifty to stay near 24,000, and want the risk capped.
2. Sell 1 put at the 24,000 strike, collecting a premium of 140.
3. Sell 1 call at the same 24,000 strike, collecting a premium of 145.
4. Buy 1 put at the 23,700 strike for 58, as the downside wing.
5. Buy 1 call at the 24,300 strike for 60, as the upside wing.
6. Calculate the net credit: (140 + 145) − (58 + 60) = 167 points, or ₹10,855 at this lot size.
7. Calculate the max loss: both wings are 300 points from the shared strike, so max loss is (300 − 167) × 65 = ₹8,645.
8. Calculate the breakevens: 24,000 − 167 = 23,833, and 24,000 + 167 = 24,167.
9. See how it resolves at expiry:
   • Nifty finishes exactly at 24,000 → maximum profit of ₹10,855.
   • Nifty finishes between a breakeven and its wing → a growing loss.
   • Nifty finishes at or beyond 23,700 or 24,300 → maximum loss of ₹8,645, capped either side.

Quick reference for the same trade:

Based on the worked example above. Notice the peak is a single point rather than a flat plateau, unlike an Iron Condor's payoff diagram. Move the cursor over the chart to see profit/loss at any price.

• Max loss can exceed max profit — in this example, ₹8,645 versus ₹10,855, though the ratio depends heavily on how close the wings are placed to the shared strike.
• The profitable range is genuinely narrow. Because there's no flat plateau, even a modest move away from the strike starts eroding profit immediately — this needs tighter conviction on price than an Iron Condor does.
• Index options on NSE are typically European-style and cash-settled — no early-assignment risk on either short leg.
• Liquidity at the wings matters, same as any defined-risk spread — check the actual bid-ask before assuming the example numbers translate directly to a live fill.