A Reverse Iron Butterfly strategy combines a Bull Call Spread and a Bear Put Spread of the same underlying security and same expiry.
This strategy is similar to the normal Butterfly strategy except that this strategy requires four contracts.
When to use this strategy?
This strategy is used when the investor expects a sharp move in the price of the underlying security either up or down.
How to build this strategy?
This strategy has four legs:
Leg 1 – Buy 1 ATM Call
Leg 2 – Sell 1 OTM Call
Leg 3 – Buy 1 ATM Put
Leg 4 – Sell 1 OTM Put
Credit Spread/Debit Spread
This is a Debit Spread strategy.
This strategy has limited profit potential.
When is this strategy profitable?
The investor earns a profit if the price of the underlying security at expiry is either below the strike price of the put option purchased, or above the strike price of the call option purchased.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor makes a loss if the price of the underlying security at expiry neither rises, nor falls.