JavaScript Finance: Calculate the profit probability of an iron butterfly option strategy

Why the Iron Butterfly? A Real-World Scenario

Imagine this: You’re an options trader who’s been watching a stock that’s been trading in a tight range for weeks. You’re confident the stock won’t break out of this range anytime soon, and you want to capitalize on this stability. Enter the iron butterfly strategy—a powerful options trading approach designed to profit from low volatility. But here’s the catch: how do you calculate the probability of profit for this strategy?

In this article, we’ll break down the iron butterfly strategy, dive into the math behind it, and show you how to calculate its profit probability using JavaScript. Whether you’re a seasoned trader or a curious developer, you’ll walk away with actionable insights and a deeper understanding of this popular options strategy.

What Is an Iron Butterfly Strategy?

The iron butterfly is a neutral options strategy that involves four options contracts:

• Buying one out-of-the-money (OTM) put
• Selling one at-the-money (ATM) put
• Selling one ATM call
• Buying one OTM call

The goal is to profit from the stock price staying within a specific range, defined by the breakeven points. The strategy earns a maximum profit when the stock price is at the strike price of the sold options (the “body” of the butterfly) at expiration.

Key Components of the Iron Butterfly

Before we dive into the code, let’s define the key components:

• Strike Price: The price at which the underlying asset can be bought or sold.
• Upper Breakeven: The highest price at which the strategy breaks even.
• Lower Breakeven: The lowest price at which the strategy breaks even.
• Profit Probability: The likelihood of the stock price staying within the breakeven range.

Calculating Breakeven Points

To calculate the profit probability, we first need to determine the breakeven points. Here’s a JavaScript function to calculate the upper and lower breakeven prices: