SPY - Iron Butterfly

benefiting from contraction in implied volatility or minimal movement

Given the current economic and political environment—marked by escalating trade tensions, mounting pressure on Fed Chair Powell, stretched equity valuations, and rising complacency toward recession risks—now may be an opportune time to establish an iron butterfly option trade on the SPY.

This strategy, which profits from a sharp contraction in implied volatility or minimal movement around a specific strike price, aligns well with the growing disconnect between asset prices and underlying fundamentals. Markets are priced for perfection, yet uncertainty around tariffs, earnings surprises in Q2, and political interference in monetary policy could inject significant volatility.

At the same time, the SPY is hovering near all-time highs with forward P/E ratios at bubble-like levels, making a reversion to the mean plausible. With elevated implied volatility premiums and investor sentiment swinging from fear to greed, the iron butterfly offers an asymmetric payoff—limited risk, defined reward—that capitalizes on a potential volatility crush or sideways market behavior heading into the August 1 tariff deadline and critical Fed communications.

Iron Butterfly for 23 July:

This Strategy has also been backtested over 18 years, using 20% capital allocation, slippage, fees and margin requirements, this will then produce the following realistic result: