Iron Butterfly Weekly

Choose a butterfly when you have high conviction that price will stay very close to a specific level. Butterflies offer higher maximum credit but narrower profit zone. Use condors for general range expectation; butterflies for pin/consolidation expectations. Most traders use condors more frequently; butterflies for special situations.

At minimum, £10,000-15,000 to trade one contract with proper sizing. With 50-point wings and ~18 point max loss (£180), and 1.5% account risk, you need account size where £180 = 1.5%. That's £12,000. Larger accounts can diversify across multiple butterflies.

Start with monthly butterflies. The lower gamma gives you more time to learn position management and make mistakes without as severe consequences. Once comfortable with monthly butterfly behavior and Greek dynamics, graduate to weekly. Weekly requires more experience and closer monitoring.

Monitor the position closely. If price moves significantly (beyond 50% of wing width) and doesn't return by Tuesday/Wednesday, consider closing for a small loss. Early exit limits damage. Don't wait hoping for recovery - the narrow profit zone means small adverse moves matter more than with condors.

It's not recommended. Thursday/Friday gamma is extreme, and small price moves can cause large P&L swings. Close by Thursday EOD at latest. If you must hold into Friday, close in the first 1-2 hours to avoid settlement risk and last-minute volatility.

Target minimum 30% of wing width; 35-40% is good; 45%+ is excellent. For 50-point wings, you want at least 15 points credit. Check if credit provides reasonable risk/reward: if max loss is 35 and credit is 15, you're risking 2.3:1. That's acceptable if win rate is decent.

Butterflies have higher theta because ATM options have maximum time value. At 5 DTE, a butterfly might have 4-5% daily theta vs a condor's 2-3%. However, butterflies also have higher gamma, so the theta/gamma ratio may be similar or worse. The faster theta is offset by higher risk of gamma-driven losses.

Consider conversion when price has moved but not breached breakeven, and you want to widen the profit zone. Buy back one ATM short and sell a new OTM option. This transforms the butterfly into a condor centered on the new price. Only do this early in the week; by Wednesday there's not enough time.

If price gaps beyond your wing at Monday open, you're at or near max loss immediately. Close the position and accept the loss. There's no recovery from a gap beyond the wing. This is why position sizing is critical - one bad gap shouldn't devastate your account.

Wider wings slightly reduce gamma concentration. Exiting earlier (Wednesday vs Thursday) avoids peak gamma. Smaller position size limits dollar impact. But fundamentally, high gamma is inherent to weekly butterflies - it's the tradeoff for high theta. If you can't accept the gamma, trade monthly or switch to condors.

Look for strikes with 2x+ open interest vs surrounding strikes, preferably round numbers (7,500, 7,600). Check max pain calculation for confirmation. High put + call combined OI indicates potential pin. But remember: pin frequency is only 20-30% of weeks, and magnitude is typically within 0.5%. Never rely solely on pin expectation.

You sell ATM (lower IV typically) and buy OTM wings (higher IV due to skew). This creates a slight structural disadvantage - you're selling 'cheap' and buying 'expensive' on a vol-adjusted basis. To compensate, ensure adequate credit and consider slight strike adjustments to capture more put skew when available.

Target theta/gamma ratio above 5 at entry. Example: if theta is 4 points/day and gamma is 0.08, ratio is 50 - excellent. If theta is 3 and gamma is 0.12, ratio is 25 - acceptable. Below 10 suggests gamma risk may overwhelm theta benefit. Monitor this ratio daily as it deteriorates approaching expiration.

Use intraday option data (hourly minimum) to capture path dependency. Simulate realistic fills (not just mid-price). Apply exit rules daily including delta monitoring. Track not just end-of-week outcome but intra-week drawdown. Validate out-of-sample. Compare to simpler condor strategy as benchmark.

Weekly butterflies complement monthly condors (different timeframe) and can hedge each other through different gamma profiles. Allocate 5-15% of options capital to weekly butterflies. Monitor aggregate portfolio theta and gamma. Weekly butterflies add theta but also concentration risk - don't over-allocate.