tell me more about the iron butterfly stradegy

1. Buy out of the money put options and at the same time, buy out of the money call options

2. The put options should have a higher delta than the call options.

The delta tells you how much the price will change for every $1 change in the stock.

3. The put and call prices should be equal (or close to it).

The reason they are equal is because they BOTH have an equal probability of expiring worthless.

4. You make money if there's volatility but not too much volatility.

If there's a lot of volatility then your put options might expire worthless but your call options might have gone up a lot so you lose on that trade.

5. How do you determine when to do this trade?

You look at historical volatility and see if there is upcoming news that might trigger volatility. If so, you do this trade before the news hits or right after it hits.

6. What happens if there's no news? Then what?

Then you probably still make money because you are buying cheap insurance against a big stock market correction while also making some profit from buying cheap insurance.

AI James Altucher