Table of Contents
The Iron Condor and Iron Butterfly are both very popular for Regular profit / income which is used by many traders. Also next thing to know is these 2 strategies is that they work on Hedging, so you pay less margin. They also have defined max loss and max profit, so you never lose more than what you know you are ready for.
Iron condors and iron butterfly options are both very similar Option Strategies and both are very popular options trading strategies. Both Iron Condor Option strategy and (Short) Iron Butterfly Option strategy (also called iron fly) can profit by selling short positions in the face of low implied volatility (IV), and both use long positions to limit risk.
Difference between iron fly and iron condor is that the maximum profit zone for a condor is much bigger than that for a butterfly, but the tradeoff is that it has a lower profit potential.
So, Iron condor is more safer with less Max Profit defined vs also Less max loss defined. Iron Butterfly is more profiteer but riskier by more Max Profit defined vs more Max Loss defined.
Iron condors and iron butterflies are options trading strategies. These positions are a bet on stability. The less an asset’s price moves, the more money you make. The more volatile the asset, the higher your risk of loss.
Both strategies are built with four simultaneous options contracts, two long and two short.
Put – A put option is one in which the holder has the right to sell the underlying asset for a certain price on a specific date.
Call – A call option is one in which the holder has the right to buy the underlying asset for a certain price on a specific date.
Long – A long position in an options contract means that you bought the contract and hold the rights that this contract gives. A long call means you, as the buyer of the contract, can buy the asset for a given price, giving the contract value if the asset’s market price increases.
Short – A short position means that you sold the contract and must honor those respective rights. So, a short call means that the call seller must sell the asset to whoever holds the contract should the holder of the contract exercise their option. Alternatively, a short put means that you must buy it from whoever holds the contract.
Note: Don’t worry too much on confusions (you will get familiar soon) this may lead by having 4 orders in strategy(2 sell and 2 buy). all you need to know is these both strategies implement correctly will have max profit and max loss limited and you can lose more than what you are prepared for.
Make sure all below have same identical expiration dates.
Once this is finished you will have a position built out of four points. Your short positions will have their strike prices clustered in the middle built around the asset’s current strike price. Your long positions will have strike prices above and below the shorts.
Make sure all below have same identical expiration dates.
Once this is finished you will have a position built out of three points in iron Butterfly option strategy. Your short positions will have their strike prices at the middle and Long positions built around the asset’s current strike price. Your long positions will have strike prices above and below the shorts.
With both an iron condor and an iron butterfly your strategy is based on the balance between your short and long positions.
Both strategies profit off the premiums by selling the short positions near the strike price. Because the strike price on the short contracts is closer to the asset’s current price than the strike price on the long contracts, you collect more premiums by selling the short contracts than you spend buying the long positions. As a result we open your strategies in a position of profit that is net premiums received – net premium paid for Long positions.
Iron condors and iron butterflies cap their risk through the Long positions, so Max loss is always defined.
If an asset’s price moves are too drastic from its starting strike price position, it becomes increasingly likely that you will have to pay one of your short positions. This increases your risk of loss.
However, once the asset’s price moves too far from its starting position, one of your long positions also goes into the money. At that point you collect premium from your long position vs premium we pay on the short position. This caps your maximum losses. So at any point we cannot lose more on an iron condor or an iron butterfly than the difference between your long call/put and short call/put.
The difference between an iron condor and an iron butterfly comes in how they work around the strike prices and the premiums of your short contracts.
In an iron condor your short contracts have different strike prices and lower premiums as they not exactly at ATM but few points away. In an iron butterfly they have the same strike price ATM and higher premiums are collected.
The strike price of your short put and the strike price of your short call are separated in an iron condor. This is usually based on the asset’s current price. For example, you may set the short call strike price 10 points higher than the current price of the asset and the short put strike price 10 points lower.
A “bearish iron condor” is when your strike prices are built around a central point that is lower than the asset’s current price. It implies that you anticipate the asset’s price will fall before stabilizing. A “bullish iron condor” is when your strike prices are built around a central point that is higher than the asset’s current price. It entails you expect the asset’s price to rise before steadying.
The strike prices of both short contracts in an iron butterfly are the same. Both strike prices are usually fixed to the asset’s current price.
A “bearish iron butterfly” is when you put your short bets to a strike price that is lower than the current price. A “bullish iron butterfly” is when you put your short bets to a strike price higher than the current price. This, like an iron condor, suggests that you expect prices to fluctuate before stabilizing.
Your short position strike prices are closer to the asset’s current price in an iron butterfly than in an iron condor. As a result, when you sell these short positions, you get a bigger premium than when you sell the short contracts of an iron condor.
Your short bets in an iron condor are set back from the asset’s current (or expected) strike price. As a result, you can tolerate greater volatility before taking losses than you can with an iron butterfly.
Say SBIN is currently trading for 200 per share.
Long Call, Strike price 300, Expiration January7, Premium 3/Share
Long Put, Strike price 100, Expiration January 7, Premium 3/Share
Short Call, Strike price 250, Expiration January 7, Premium 5/Share
Short Put, Strike price 150, Expiration January 7, Premium 5/Share
Since your short contracts are closer to being in the money ITM than your long contracts, they have higher premiums. With the iron condor each short position gives you a more margin/net premium. The asset price can move up or down before either short contract goes in the money.
This margin of error tolerable is the difference between an iron condor and an iron butterfly.
Long Call, Strike price 300, Expiration January 1, Premium 3/Share
Long Put, Strike price 100, Expiration January 1, Premium 3/Share
Short Call, Strike price 200, Expiration January 1, Premium 6/Share
Short Put, Strike price 200, Expiration January 1, Premium 6/Share
This is a standard iron butterfly position, which means you have sold your short contracts ATM (at the money). It is almost certain that one of these contracts will go ITM (in the money) since the probability of Zero (0) movement is extremely low. This allows you to charge a high premium for each contract.
However, an iron butterfly starts with no margin of error tolerable. The question is not how much this SBIN can move before you begin paying on this position. Instead, it is whether this stock will move so much that your losses on the short position exceed the premiums you collected up front.
In both strategies your risk is capped by your long positions we hold. If the asset’s price moves by enough to cause either your long call or your long put to go ITM then your profits from that contract offset any further losses we make from short position.
An iron condor is a lower risk vs lower reward position compared to iron butterfly. Since an iron butterfly strategy short positions are set close to or at the asset’s current price it collects higher premiums than an iron condor strategy can. You can always make more money with an iron butterfly if everything goes well.
An iron butterfly is a higher risk vs higher reward position compared to iron condor.
Both the strategy’s are best to employ if you expect volatility to be low and falling down.
An iron condor offsets this lower profit potential by building in a safety net for a margin of error for movement of stocks price.
Long Call, Strike price 300, Expiration January7, Premium 3/Share
Long Put, Strike price 100, Expiration January 7, Premium 3/Share
Short Call, Strike price 250, Expiration January 7, Premium 5/Share
Short Put, Strike price 150, Expiration January 7, Premium 5/Share
Long Call, Strike price 300, Expiration January 1, Premium 3/Share
Long Put, Strike price 100, Expiration January 1, Premium 3/Share
Short Call, Strike price 200, Expiration January 1, Premium 6/Share
Short Put, Strike price 200, Expiration January 1, Premium 6/Share
At the outset, the iron butterfly is a far more profitable position.
5 (the short premiums) x 200 (the number of shares in two contracts) = 1000
3 (the long premiums) x 200 (the number of shares in two contracts) = 600
1000 – 600 = 400 Starting Gains
6 (the short premiums) x 200 (the number of shares in two contracts) = 1200
3 (the long premiums) x 200 (the number of shares in two contracts) = 600
1200 – 600 = 600 Starting Gains
At the outset our iron butterfly position is worth 600, much more than the iron condor 400. This will remain true so long as SBIN’s price does not change. This is the high reward aspect of the iron butterfly.
If SBIN fluctuates by more than ATM strike price (where we hold Short positions) towards any of the 2 Long positions , the iron butterfly profit begin declining till max loss defined by difference of premiums received minus premiums to be paid till Long position which restricts our losses.
The downside to an iron butterfly begins if the asset shows volatility. With the iron condor, SBIN’s price can change by 100 on either side and the position will retain its full value because neither short position will go in the money.
If SBIN fluctuates by more than 100 between 2 short contracts, the iron condor profits will begin declining.
Iron condors and iron butterflies are low-volatility options trading strategies. Iron butterflies have a higher potential for profit, but they also come with a bigger danger. You have more room for error with an iron condor, but you have less profit potential. Because these are options strategies, investors must have a thorough understanding of how options work — for example, how options differ from futures – as well as the potential drawbacks of utilizing these more complex techniques.
Delta: The net delta of a Short Iron Butterfly spread remains close to zero (Zero impact) if underlying assets remains at middle strike. Delta will move towards -1 if the underlying assets expire above the higher strike price and Delta will move towards 1 if the underlying assets expire below the lower strike price.
Vega: Short Iron Butterfly or Iron condor has a negative Vega. Therefore, one should initiate Short Iron Butterfly spread when the volatility is high and is expected to fall.
Theta: With the passage of time, if other factors remain the same, Theta will have a positive impact on the strategy.
Gamma: This strategy will have a short Gamma position, so the change in underline asset will have a negative impact on the strategy.
Despite the distinctions between iron butterfly and iron condor options, most people would agree that both strategies have a lot in common, as they both require similar criteria to succeed in making a profit. Both the Iron condor and the iron condor trading methods have their own set of advantages and disadvantages, which vary depending on investment and time constraints. However, when using these tactics, one must always exercise caution because they necessitate a thorough and in-depth study of the industry.
Discover how big players in the futures and options market win by selling options.
Learn about the exiting of open interest of call options and its implications in the…
Learn how to select stocks for intraday trading based on open interest.
Let get into depth of Volatility and Implied Volatility Volatility measures the rate of price…
Selection of stocks for Results season We can choose stocks for the upcoming three…
How to control emotions and trade in market? In Simple words how does market work?…