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In finance an iron butterfly, also known as the ironfly, is the name of an advanced, neutral-outlook, options trading strategy that involves buying and holding four different options at three different strike prices.
Payoff chart from buying a butterfly spread. Profit from a long butterfly spread position. The spread is created by buying a call with a relatively low strike (x 1), buying a call with a relatively high strike (x 3), and shorting two calls with a strike in between (x 2).
A box spread position has a constant payoff at exercise equal to the difference in strike values. Thus, the 40-50 box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise.
For parity, the profit should be zero. Otherwise, there is a certain profit to be had by creating either a long box-spread if the profit is positive or a short box-spread if the profit is negative. [Normally, the discounted payoff would differ little from the net premium, and any nominal profit would be consumed by transaction costs.]
The payoff of this portfolio is always the same: you will purchase the underlying call at the time of maturity of the compound options. If the underlying call's price at the time of maturity is greater than the strike price, you will exercise your CoC and purchase the underlying call at its strike price.
An option payoff diagram for a long straddle position. A long straddle involves "going long volatility", in other words purchasing both a call option and a put option on some stock, interest rate, index or other underlying. The two options are bought at the same strike price and expire at the same time. The owner of a long straddle makes a ...
An asymmetric payoff (also called an asymmetric return) is the set of possible results of an investment strategy where the upside potential is greater than the downside risk. [1] Derivative contracts called “options” are the most common instrument with asymmetric payoff characteristics. [ 2 ]
The payoff depends on the optimal (maximum or minimum) underlying asset's price occurring over the life of the option. The option allows the holder to "look back" over time to determine the payoff. There exist two kinds of lookback options: with floating strike and with fixed strike.