Iron condors and iron butterflies are two popular options trading methods that are extremely similar. Both may benefit by selling short bets in the face of low implied volatility, and both can reduce risk by holding long tones. There are significant distinctions despite their similarities. The main difference is that a condor’s maximum profit zone is significantly larger than that of a butterfly, but the tradeoff is lesser profit potential. Here’s you should know the difference between iron condor vs iron butterfly.
A financial adviser, in addition to options, may offer you alternative strategies to earn profits in a calm market.
What Is the Difference Between Iron Condors and Iron Butterflies?
Options trading tactics such as iron condors and iron butterflies exist. These holdings represent a gamble on long-term stability. The lower the price movement of an asset, the more money you earn. The larger your chance of loss, the more volatile the asset.
Both methods rely on four concurrent option contracts, two long and two short.
- Put/Call – A put option gives the holder the right to sell the underlying asset at a certain price on a specific date. A call option gives the holder the right to acquire the underlying asset at a certain price on a specific date.
- Long/Short – A long position in an options contract indicates that you purchased the contract and have the rights that come with it. A long call implies that you, as the contract buyer, may purchase the asset for a specified price, with the contract value increasing if the asset’s market price rises. A long put implies that you may sell the asset for a specified price, resulting in the contract value if the asset’s market price decreases. A short position indicates that you sold the contract and must fulfill those rights. A short call indicates that the call seller must sell the asset to the contract holder if the contract holder exercises their option. A short put, on the other hand, indicates that you must purchase it from whoever controls the contract.
You open options contracts with the same expiry dates for an iron condor and an iron butterfly:
- Long Call: Purchase a call contract with a strike price greater than the asset’s current price.
- Long Put: Purchase a put contract with a strike price lower than the asset’s current price.
- Short Call: Sell a call contract with a strike price lower than the strike price of your long call.
- Short Put: Sell a put contract with a strike price greater than the strike price of your long put.
When you’re done, you’ll have a position made up of four points. Your short positions will have strike prices in the middle, often centred on the asset’s current strike price. Your long positions will have strike prices that are higher and lower than the shorts.
Your approach with an iron condor and an iron butterfly is dependent on the balance of your short and long positions.
Both methods earn from the premiums you get when you sell your short holdings. Because the strike price on the short contracts is closer to the asset’s current price than the strike price on the long contracts, selling the short contracts earns you more money than purchasing the long positions. As a consequence, you begin your approach in a profitable position.