Double Diagonal Iron Butterfly

The Double Diagonal Iron Butterfly is a complex, income-generating options strategy that combines the concepts of an iron butterfly with diagonal spreads. Unlike the standard iron butterfly, this variation uses differing expiration dates and strikes for the wings—adding flexibility and sensitivity to time decay and volatility changes.

Structure

• Sell 1 At-the-Money Call (near-term expiration)
• Buy 1 Out-of-the-Money Call (longer expiration)
• Sell 1 At-the-Money Put (near-term expiration)
• Buy 1 Out-of-the-Money Put (longer expiration)

Diagonal legs mean the long options expire later than the short options, and typically have different strikes.

Profit & Loss Profile

• Maximum Profit: If the underlying stays near the short strikes until the near-term expiration, allowing you to keep the premium and retain value in the longer-dated wings
• Maximum Risk: Limited and defined by the net debit and strike spacing, but exposure can shift depending on volatility and time to expiration
• Breakeven Points: More complex; influenced by premiums, expirations, and underlying behavior
• Greeks: Exposed to Theta (positive time decay from short options) and Vega (volatility sensitivity from longer-dated options)

Example

Suppose a stock is trading at $100. A trader constructs:

• Sell 1 x $100 Call (expires in 2 weeks)
• Buy 1 x $105 Call (expires in 4 weeks)
• Sell 1 x $100 Put (expires in 2 weeks)
• Buy 1 x $95 Put (expires in 4 weeks)

If the stock stays around $100 through the near-term expiration, the trader benefits from the short options expiring worthless, while the longer-dated wings retain some value or act as a hedge for extended market moves.

Ideal Market Conditions

• Outlook: Neutral with low directional bias
• Volatility: Favorable when IV is elevated for the short options and expected to decline
• Time Horizon: Short-term premium capture with longer-term protection
• Goal: Maximize income while maintaining flexibility via time and strike separation

Risk Considerations

• Requires active management—early assignment or rapid price movement can disrupt balance
• Calendar mismatches can expose risk between expirations
• Margin and complexity higher than basic spreads
• Liquidity can be challenging in longer-dated or far OTM strikes

Summary

The Double Diagonal Iron Butterfly is a versatile and advanced strategy for traders comfortable navigating multi-leg spreads with mixed expirations. It allows for precise premium capture while protecting against unexpected volatility shifts or extended trends—perfect for seasoned options traders aiming to capitalize on time and structure.