Cboe S&P 500 Iron Butterfly Index (BFLY℠)

The Cboe S&P 500 Iron Butterfly Index^SM (BFLY) is inspired by the butterfly option strategy. The objective of a butterfly option spread is to mine "near-the-money" option volatility premia with limited risk.  In the same vein, the BFLY index tracks the value of a  hypothetical portfolio that overlays a short SPX at-the-money straddle and long 5% out-of-the-money SPX call and put. To guarantee solvency, the Treasury bills cover ten times the maximum loss of the short butterfly spread. The BFLY portfolio is calculated once per day, and it is rebalanced monthly, usually  at 11 am ET every third Friday after the options in the butterfly spread expire. A new SPX butterfly spread is then sold. hypothetical portfolio that overlays a butterfly spread of SPX options over one-month Treasury bills. 

Resources

• BFLY Historical Price Data
• BFLY Index Methodology Paper

Short Iron Butterfly Strategy

Goal

Short index iron butterflys often are established at a net credit, and if the stock index stays in a narrow range, there is potential for there to continue to be a net credit.

Strategy

To implement an index short iron butterfly strategy: take options positions with the same expirations at three different strike prices: (1) long out-of-the-money index call positions at a higher strike price, (2) long out-of-the money index put positions at a lower strike price, and (3) short index calls and short index puts at a middle strike price.

Comment

The potential for both profit and for risk usually is limited for short iron butterflys.