Definition
Iron Fly
An iron fly is another name for the iron butterfly — a short at-the-money straddle protected by far out-of-the-money wings.
The iron fly sells an at-the-money call and put for maximum premium and buys protective wings further out to cap risk on both sides. It earns the most if the underlying expires right at the central strike and has a narrow profit zone with defined maximum loss.
Indian Nifty and Bank Nifty traders use the iron fly on expiry day to capture rapid theta burn while keeping risk limited, often centring it near the expected pin or max pain strike. Compared with an iron condor it collects more premium but needs the underlying to stay closer to the centre.
Related terms
- Max PainMax pain is the strike price at which the largest number of option buyers would lose money on expiry.
- Short StraddleA short straddle sells a call and a put at the same strike to profit when the underlying stays calm and range-bound.
- Iron CondorAn iron condor sells an out-of-the-money call spread and put spread to earn premium in a range-bound market with defined risk.
- Iron ButterflyAn iron butterfly sells an at-the-money straddle and buys protective wings, for high premium with defined risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.