Iron Condor Versus Iron Butterfly

Percentage of Profit vs. Risk/Reward Ratio 

The first thing we notice is that the Iron Condor has a wider profit zone than the Iron Butterfly. We have a much greater range in price to receive a full profit of our credit on expiration. In contrast, the Iron Butterfly has a higher credit initially, and thus maximum profit. If the stock stays completely unchanged, the Iron Butterfly will make more than the Iron Condor.

Yet achieving that maximum profit would involve the stock sticking to the straddle price. Neither of these scenarios are inherently better than the other. Smaller, more frequent winners or bigger, less frequent winners; the expected value is the same.

Vega 

As the Iron Butterfly sells options at the money, it will have a higher Vega exposure than the Iron Condor on inception. This means that for every point change in implied volatility, the Iron Butterfly will make or lose more money. This is because changes in vega tend to affect ATM options the most.

At inception, this allows us to be more sensitive to the short vega we want. Conversely, we could sell more Iron Condors to get the same vega exposure. The disadvantage of this is simple: more contracts, more commission, and slippage.

With an underlying under $20, an Iron Condor is simply costing too much. When you pay out a big chunk of your credit in commissions and slippages, that eats directly into your edge. If you are getting a credit of 20 cents to put on the trade, you probably need to avoid trading the underlying or switch to a straight short straddle.

Note that as the underlying price moves, vega changes. For example, if the price moves outside our wings, we can actually become long vega.

Liquidity  

Sometimes liquidity can be better for either the ATM or slightly OTM strikes. Popular round number strikes (ex. 100) will have greater liquidity and open interest than other numbers (ex. 99). This is not a major issue for the most popular stocks, but for smaller illiquid options chains, it can pose a problem.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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