What is the margin on a Butterfly option strategy?
In order for the software utilized by IB to recognize a position as a Butterfly, it must match the definition of a Butterfly exactly. These are the 3 different types of Butterfly spreads recognized by IBKR, and the margin calculation on each:
Long Butterfly:
Two short options of the same series (class, multiplier, strike price, expiration) offset by one long option of the same type (put or call) with a higher strike price, and one long option of the same type with a lower strike price. All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal.
There is no margin requirement on this position. The long option cost is subtracted from cash and the short option proceeds are applied to cash.
Short Butterfly Put:
Two long put options of the same series offset by one short put option with a higher strike price and one short put option with a lower strike price. All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal.
The margin requirement for this position is (Aggregate put option highest exercise price - aggregate put option second highest exercise price). Long put cost is subtracted from cash and short put proceeds are applied to cash.
Short Butterfly Call:
Two long call options of the same series offset by one short call option with a higher strike price and one short call option with a lower strike price. All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal.
The margin requirement for this position is (Aggregate call option second lowest exercise price - aggregate call option lowest exercise price). Long option cost is subtracted from cash and short option proceeds are applied to cash.
*Please note that Interactive Brokers utilizes option margin optimization software to try to create the minimum margin requirement. However, due to the system requirements required to determine the optimal solution, we cannot always guarantee the optimal combination in all cases. Other option positions in the account could cause the software to create a strategy you didn't originally intend, and therefore would be subject to a different margin equation.