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Iron Butterfly Options Strategy Example

This example demonstrates a comprehensive Iron Butterfly options selling strategy with hedging for income generation and risk management.

Files​

  • main.py - Entry point to run the strategy
  • strategy.py - Main Iron Butterfly strategy implementation
  • position_manager.py - Position manager for options trades
  • README.md - This documentation

Strategy Logic​

The Iron Butterfly is a neutral options strategy that profits from low volatility and time decay:

  • Sell ATM Call & Put: Generate premium income
  • Buy OTM Call & Put: Limit maximum loss (hedging)
  • Net Credit: Receive more premium than paid
  • Profit Zone: Between the breakeven points
  • Max Loss: Limited to net debit paid

Strategy Components​

Iron Butterfly Structure​

Strike Prices: [OTM Put] [ATM Put] [ATM Call] [OTM Call]
Positions:     [BUY]     [SELL]    [SELL]    [BUY]

Example with Nifty at 19,000:​

  • Buy PE 18,900 (OTM Put) - Hedge
  • Sell PE 19,000 (ATM Put) - Income
  • Sell CE 19,000 (ATM Call) - Income
  • Buy CE 19,100 (OTM Call) - Hedge

Key Features​

  • ✅ Premium Collection: Sells ATM options for income
  • ✅ Risk Hedging: Buys OTM options to limit losses
  • ✅ Neutral Strategy: Profits from low volatility
  • ✅ Time Decay: Benefits from theta (time decay)
  • ✅ Risk Management: Limited maximum loss
  • ✅ Weekly Expiry: Trades current week options

Strategy Parameters​

Option Selection​

# Strike price offsets from ATM
otm_strike_offset = 5  # 5 points OTM for hedging
atm_strike_offset = 0  # ATM for selling

# Expiry selection
expiry = ("Weekly", 0)  # Current week expiry

Risk Management​

# Maximum loss threshold
max_loss = 500  # ₹500 maximum loss per trade

# Position sizing
lot_size = 1  # 1 lot per trade

Iron Butterfly Explained​

What is Iron Butterfly?​

The Iron Butterfly is a four-leg options strategy that combines:

  1. Short Straddle (Sell ATM Call + Put)
  2. Long Strangle (Buy OTM Call + Put)

Profit & Loss Profile​

  • Maximum Profit: Net premium received
  • Maximum Loss: Net debit paid (limited)
  • Breakeven Points: 2 breakeven levels
  • Profit Zone: Between breakeven points

When to Use​

  • Low Volatility: When expecting sideways movement
  • Time Decay: Close to expiry for maximum theta
  • Range Bound: When price stays within breakeven points
  • Income Generation: Regular premium collection

Strategy Implementation​

Entry Conditions​

def should_trade(self):
    # No pending orders
    if len(self.pending_orders) > 0:
        return False

    # No existing positions
    if len(self.positions) > 0:
        return False

    # Within loss limits
    if self.net_pnl.loss >= 500:
        return False

    return True

Option Legs Creation​

# OTM Call (Hedge)
ce_otm = await self.add_option(
    symbol_name=SymbolType.Index.NIFTY,
    expiry_input=("Weekly", 0),
    option_type="CE",
    strike_price_input=5,  # 5 points OTM
)

# ATM Call (Sell)
ce_atm = await self.add_option(
    symbol_name=SymbolType.Index.NIFTY,
    expiry_input=("Weekly", 0),
    option_type="CE",
    strike_price_input=0,  # ATM
)

# ATM Put (Sell)
pe_atm = await self.add_option(
    symbol_name=SymbolType.Index.NIFTY,
    expiry_input=("Weekly", 0),
    option_type="PE",
    strike_price_input=0,  # ATM
)

# OTM Put (Hedge)
pe_otm = await self.add_option(
    symbol_name=SymbolType.Index.NIFTY,
    expiry_input=("Weekly", 0),
    option_type="PE",
    strike_price_input=-5,  # 5 points OTM
)

Order Execution​

order_items = [
    # Buy OTM Call (Hedge)
    OrderItem(ce_otm, PositionType.BUY, 1),
    # Sell ATM Call (Income)
    OrderItem(ce_atm, PositionType.SELL, 1),
    # Sell ATM Put (Income)
    OrderItem(pe_atm, PositionType.SELL, 1),
    # Buy OTM Put (Hedge)
    OrderItem(pe_otm, PositionType.BUY, 1),
]

await self.create_multiple_orders(order_items=order_items)

Risk Management​

Position Sizing​

  • Lot Size: 1 lot per trade (adjustable)
  • Capital Allocation: Based on risk tolerance
  • Maximum Positions: 1 Iron Butterfly at a time

Loss Limits​

  • Maximum Loss: ₹500 per trade
  • Stop Loss: Exit if loss exceeds threshold
  • Position Monitoring: Real-time P&L tracking

Hedging Benefits​

  • Limited Risk: Maximum loss is net debit paid
  • Premium Collection: Earn from time decay
  • Volatility Protection: Profits from low volatility

Example Scenarios​

Scenario 1: Profitable Trade​

Nifty Price: 19,000
Strategy: Iron Butterfly 18,900/19,000/19,100

Entry:
- Buy PE 18,900: ₹50 (debit)
- Sell PE 19,000: ₹100 (credit)
- Sell CE 19,000: ₹100 (credit)
- Buy CE 19,100: ₹50 (debit)

Net Credit: ₹100 (₹200 credit - ₹100 debit)

Exit at Expiry (Nifty = 19,000):
- All options expire worthless
- Profit: ₹100 (net credit received)

Scenario 2: Loss Scenario​

Nifty Price: 19,000 → 19,200 (moves up)

Exit at Expiry:
- PE 18,900: Expires worthless (₹0)
- PE 19,000: Expires worthless (₹0)
- CE 19,000: Exercise value ₹200 (loss)
- CE 19,100: Exercise value ₹100 (gain)

Net Loss: ₹100 (₹200 loss - ₹100 gain)

Performance Tracking​

Key Metrics​

  • Total Trades: Number of Iron Butterfly trades
  • Win Rate: Percentage of profitable trades
  • Average Profit: Average profit per trade
  • Maximum Drawdown: Largest consecutive losses
  • Premium Collected: Total premium received

Trade Logging​

🦋 IRON BUTTERFLY TRADE EXECUTED
   Symbol: NIFTY
   Expiry: Weekly
   Strikes: 18,900/19,000/19,100
   Net Credit: ₹100
   Max Loss: ₹100
   Breakeven: 18,900 - 19,100
==================================================

Best Practices​

Market Conditions​

  • Low Volatility: Best for Iron Butterfly
  • Range Bound: Price stays within breakeven
  • Time Decay: Close to expiry preferred
  • Liquidity: Ensure good option liquidity

Risk Management​

  • Position Sizing: Start with small lot sizes
  • Loss Limits: Set strict maximum loss
  • Monitoring: Watch position closely
  • Exit Strategy: Have clear exit rules

Option Selection​

  • Strike Selection: Choose appropriate strikes
  • Expiry Selection: Weekly options preferred
  • Liquidity: Ensure good bid-ask spreads
  • Greeks: Understand delta, gamma, theta

Configuration​

Strike Price Offsets​

# Conservative (wider wings)
otm_strike_offset = 10  # 10 points OTM

# Aggressive (narrower wings)
otm_strike_offset = 5   # 5 points OTM

Risk Parameters​

# Conservative risk
max_loss = 300  # ₹300 maximum loss

# Aggressive risk
max_loss = 500  # ₹500 maximum loss

Usage​

python main.py

The strategy will automatically:

  • Connect to your broker
  • Check market conditions
  • Create Iron Butterfly positions
  • Monitor positions for exit
  • Manage risk according to limits

Example Output​

🦋 IRON BUTTERFLY STRATEGY STARTED
📊 Market: NIFTY
⏰ Expiry: Weekly
💰 Max Loss: ₹500
==================================================

🦋 IRON BUTTERFLY TRADE EXECUTED
   Symbol: NIFTY
   Expiry: Weekly
   Strikes: 18,900/19,000/19,100
   Net Credit: ₹120
   Max Loss: ₹80
   Breakeven: 18,900 - 19,100
==================================================

📈 POSITION MONITORING
   Current P&L: ₹45
   Time to Expiry: 2 days
   Status: Profitable
==================================================

Next Steps​

Disclaimer​

This is an educational example. Options trading involves significant risk:

  • Limited Risk: Maximum loss is net debit paid
  • Time Decay: Options lose value over time
  • Volatility Risk: High volatility can cause losses
  • Assignment Risk: Early assignment possible
  • Liquidity Risk: May be difficult to exit

Always:

  • Understand the risks involved
  • Start with paper trading
  • Use proper position sizing
  • Have clear exit strategies
  • Consult with financial advisors
  • Never invest more than you can afford to lose