Trading Iron Butterflies On Nadex Binaries

At first glance, the term “Iron Butterfly” may sound like an oxymoron. Iron is an element that is hard and strong. A butterfly is an insect that flies gracefully through the air. How can something that is hard and strong and something that flies gracefully through the air be related, first to each other and second, to trading? This is a strong strategy and if you could draw a diagram on your chart of the positions you hold, it kind of resembles a butterfly, and each contract can be thought of as a wing.

In trading, there is a butterfly strategy and an iron butterfly strategy. However, when traded on the Nadex platform, there is not a lot of difference between the two. The iron butterfly can refer to the premium that is collected, but many times, the terms are interchangeable.

If you were trading options, the basic butterfly would be a debit spread that requires four contracts, whereas the iron butterfly is a credit spread that pays you a net premium at the open and requires three contracts.

This strategy is often done on currency pairs that have consistently showed a low volatility on a news release. This type of trade is set to expire shortly after the news release- less than two hours away. Select an ITM binary trade ideally with $15-25 max profit potential on both sides of the buy and the sell. You want to choose them close to equal distances from where the market is currently trading.

To implement this strategy, you want to sell the upper contract and buy the lower contract, hoping that the market expires in between the two. That way, you profit on both sides. Here’s an example to better understand how this strategy works.

Sell US Tech 100 >2836 (4:15PM) @ $30 or higher
Buy US Tech 100 >2824 (4:15PM) @ $70 or less

You can see that this example is showing that you should place two separate orders on the same instrument: one buying and one selling. They both have the same expiration times. If the market settles between 2824 and 2836, you will be profitable on both of your contracts. How much? As the market stays in the middle of the two strikes and time draws closer to expiration, time is expiring and the value increases. Let’s suppose you were able to buy the above binary for $70 and you exited before expiration at $95. That’s a profit of $25. On the sell side, let’s say you were able to sell the above binary for $30, and again you exited before expiration to protect your profits at $5, giving you a profit of $25. Your total profit on this iron butterfly trade would have been $50! That’s pretty good!

But what if one side wasn’t profitable? What if the market moved against you and went flying right up past 2836 and settled at 2840? Well, using the same numbers from above, you would have lost $70 on the sell side of your butterfly. On the buy side, you would have still made the same profit of $30, if you exited early, with a $40 loss overall. When doing the iron butterfly strategy, it is extremely important to have your take profits set, in case the market moves up or down. Then, the one “wing” can catch its side of the profit. Once that side has profited, you hope the market moves again so that the other “wing” can catch profit. You make profit again and exit before expiration. That is always the ideal binary butterfly scenario.

Let’s analyze this Iron Butterfly trade further. It offers a great win loss ratio should there be a full loss on one side of $70, the other side would profit $30 with a max loss of $40. However, if it expires between the strikes and they both profit, then the max profit potential is $60, with only a $40 max risk.

On any iron butterfly trade, be sure to have stop triggers set or manage your stops to prevent a full loss on one side. It is a good idea to exit when it hits the strike and the price is around $50. This will allow you to break even as one side will lose and one will profit around $25-30.

If you are using this strategy before a news announcement, you’d want to enter the trade approximately five to twenty minutes before the news is released. This would allow you to take advantage of the increase in the implied volatility which would let you trade in a wider range thereby allowing for more profit potential.

This is a strategy that you can leg into. This means that you can enter into either the upper contract or the lower contract and then enter the other side at a more opportune time. Other contracts can also be added onto the original ones, creating more legs.

To learn more about Iron Butterflies and other binary strategies and how to trade them on Nadex, go to www.apexinvesting.com. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 8000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, Forex, stock and options, and gain an edge for successful trading overall.