SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Iron Condor vs. Iron Butterfly


Iron Condor and Iron Butterfly are both very popular strategies. Both of them are usually used as non-directional strategies (although butterflied can be used as a directional trade as well). Both trades are vega negative and gamma negative, but there are also few important differences between those two strategies.

Iron Condor Description

Iron Condor is a vega negative gamma negative trade. Choosing the strike prices for your iron condor position – and deciding how much cash credit you are willing to accept for taking on the risk involved – are irrevocably linked. If your strike has lower deltas, you will get less credit, but also higher probability. As we know, Risk/reward and Probability of Success have reverse relationship.
 

Construction:

  • Buy one out-of-the-money put with a strike price below the current price. 

  • Sell one out-of-the-money put with a strike price closer to the current price.

  • Sell one out-of-the-money call having a strike price above the current price.

  • Buy one out-of-the-money call with a strike price further above the current price.

Lets take a look at typical Iron Condor trade using SPX and 15 deltas for the short options.

image.png


As we can see, we are risking ~$750 to make ~$250 (around 33% gain), but we have a fairly high probability of success (~78%). We can select tighter strikes, for higher credit and better risk/reward, but we will be sacrificing the probability of success.
 

Iron Butterfly Description

Iron Butterfly spread is basically a subset of an Iron Condor strategy using the same strike for the short options. 
 

Construction:

  • Buy one out-of-the-money put with a strike price below the current price. 

  • Sell one at-the-money put.

  • Sell one at-the-money call.

  • Buy one out-of-the-money call with a strike price above the current price.

Lets take a look at Iron Butterfly trade using SPX:
 

image.png

As we can see, we are risking ~$880 to make ~$4,120 (around 455% gain), but we have a fairly low probability of success (~30%). We can select further OTM long strikes, for lower credit and higher probability of success. But generally speaking, Iron Butterfly will usually have a better risk/reward but lower probability of success than Iron Butterfly.

 

Which one is better?

As you can see, there are tradeoffs to each strategy. Both strategies benefit from range bound markets and decrease in Implied Volatility. The Iron Butterfly has more narrow structure than the Iron Condor, and has a better risk-to-reward, but also lower probability of success. If the underlying stays close to the sold strike, the iron Butterfly trade will produce much higher returns.

Both strategies require that the underlying price stay inside of a range for the trade to be profitable. The Iron Condor gives you more room, but the profit potential is usually much less.


Generally speaking, Iron Condor is a High(er) Probability trade and Iron Butterfly is a Low(er) Probability trade. However, those probabilities refer to holding both trades till expiration. In reality, we rarely hold them till expiration. We usually set realistic profit targets and exit at least 2-3 weeks before expiration, to reduce the negative gamma risk

The bottom line is that the strategies are pretty similar because they profit from the same conditions. The major difference is the maximum profit zone, for a condor is much wider than that for a butterfly, although the tradeoff is a lower profit potential.

Related articles

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Where to Find Exceptional Trading Data?

    Options traders are “data wonks,” meaning we all rely on information to make what we hope are informed decisions. But how do you know the difference between valuable and reliable data on the one hand, and rumor or speculation on the other?

    By Michael C. Thomsett,

    • 0 comments
    • 29 views
  • Option Equivalence

    Some option positions are equivalent – that means identical profit/loss profiles – to others. Others are not. A few days ago I had an inquiry from a person trading options in a restricted account (e.g. an IRA that did not allow marginable trades or short options positions):

    By cwelsh,

    • 0 comments
    • 125 views
  • Investment Ideas for Conservative Investors

    Investors with low willingness or need to take risks often look to bank and/or life insurance company fixed-rate products to increase potential returns instead of leaving their money in conventional checking or savings accounts. Some of these product types are CD’s, structured notes, fixed annuities and fixed indexed annuities.

    By Jesse,

    • 0 comments
    • 183 views
  • iVolatility Tools: Advanced Ranker

    Here is one of the analytical tools that allows us to claim "In options we are Big Data!" For those who want to find the movers and shakers, Advanced Ranker does the job. The Advanced Ranker combines an easy to use interface with a powerful sorting logic built on IVR and IVP.

    By Levi Ioffe,

    • 0 comments
    • 159 views
  • Two Pre-earnings Momentum Trades With a Technical Trigger in Alphabet

    Both option trading backtest approaches rely on the fact that there has been a bullish momentum pattern in Alphabet stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. 

    By Ophir Gottlieb,

    • 0 comments
    • 348 views
  • Flaws in Implied Volatility

    A technical study of chart patterns, focusing on historical volatility of the underlying, reveals that depending on implied volatility is a flawed idea. Traders should remember that options are derivatives, meaning their premium value is derived from historical volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 409 views
  • 7 Trading Cliches For Novice Traders

    Trading is a tough business. There is no easy money in the stock market, but there are a lot of folks who will easily take your money. What is important to know that no matter how experienced you are, mistakes will be part of the trading process. This article should help you to avoid some of those mistakes.

    By Kim,

    • 0 comments
    • 377 views
  • Iron Condor vs. Iron Butterfly

    Iron Condor and Iron Butterfly are both very popular strategies. Both of them are usually used as non-directional strategies (although butterflied can be used as a directional trade as well). Both trades are vega negative and gamma negative, but there are also few important differences between those two strategies.

    By Kim,

    • 0 comments
    • 384 views
  • Leveraged Anchor: A Three Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for three months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 10 comments
    • 1,094 views
  • How a Fund is Developed

    Many individuals are curious as to the testing process for a new fund.  With the plethora of funds continually being developed, having some insight into this process can be helpful for investors.  At the very least, it can provide a series of questions which should be asked in conducting due diligence on fund managers.

    By cwelsh,

    • 0 comments
    • 308 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs