In this week’s post, we’ll take a look at Iron Condors versus Butterflies when it comes to option trading, and are they useful.
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Question from Ion Grigoras: Do you like Iron Condors and Butterflies? I don’t see them being useful or effective.
Stay with me because I want to show you how useful and effective these things can be.
To get things started, you have to understand the big picture behind iron condors and butterflies.
- What are they there for?
When it comes to iron condors, you can dictate how wide you go. The wider that you go, the less money that you make, but the more successful you can be.
If we look at Amazon and decide that we want this thing to be successful, we could go selling puts and calls out of the money or in the money at about 5%-7%.
I’m not going to make a lot of money because you’re going far and wide. But you have a higher degree of success compared to going in tighter. Let’s do that example here. I’ll show you here at 1600, let’s say sell an Iron Condor. I’m going to put this up right here, and I’ll take a few of these older trades off for you. Or the simulations and now we’re selling 1600. Then we’ll buy 1570, make that live price. And on the call side, the current price is 1931.58
That means that we need to go way above that. If I want to check the percentage-wise, I could look and say my Delta or probability and the money probably around the 2220 level. I’m going to sell that one – 2220. And you’re buying probably 2240. Look at this. We have wide condor.
My chance of success on this is fairly high. That’s because this stock can wiggle around, and it will still be profitable.
How profitable?
Well, I make $215 on about a $1788 investment. That’s almost a little more than 10%. I make quite a bit of money there just simply for if that stock what goes around and expires in this price range.
That seems to me reasonably useful because now you could stretch and condense this. You can say that you want to make a little more money. Well, what do you do?
If you want more money and you’re willing to take on more risk. I’ll bring this in from the call side, and I’ll go to 2120.Now we’ll go into this one – call it 2160. We brought that in on the call side, and we’ll also bring things in on the put side.
I’ll bring things in 1750 and the one we buy for protection maybe around 1710. In this case, I make a lot more. I make about $1132 on about $2800 of capital. That is, to me, is phenomenal returns.
However, the chance of this succeeding is way lower. You ask why?
Well, because I’ve brought things in. Now my theta decay here is a lot bigger, so that’s a huge advantage.
But if this stock goes around, I only have about a two hundred point range compared to the other iron Condor I had an extra maybe hundred to two hundred points of a room.
That’s a big difference. This is where the Iron Condor shine. You can make them as wide as you want. But then if the wider you go you make less money. And there is less risk. If you go tighter, you make more money, but you have more risk.
You might think you can’t turn iron condor into a butterfly. Well, you have two contracts at the same price. How do I make it a butterfly?
Well, I take the ones I’m short, and I bring them in. Let’s say I go into 1900.
I’ll go into the ones that I’m selling the call side I’ll go back into this 1900. And the put side the one I’m also selling 1900. And that’s it. It is a butterfly.
We are very spaced out very wide. I could bring some of these into maybe 2100. Check out this.
What is the useful point behind a butterfly?
Well, you capture theta fast? If you want fast data return you want to be in and out of the trade-in a couple of days, this thing shines.
Look at your theta. Why is it more? Well, that’s because you’re at the money the ones that decay the fastest are the closest to the money or at the money. And because we’re right there where the price is you could be in this trade 2-3 days, and you’re out about $200-$300. You’re profitable. This is where these things shine.
Let’s say I’m a little skewed positive. What can you do? Well, you can bring one side or one leg tighter. I’ll do that.
Look at this. I have a little bit skewed position to the upside; I’m directionally biased. But I still have a very high data return.
Think of it in that way. How do you structure the trade to cater and work with the market? This is what’s interesting about this trade. It could still go down, and you make money. It can stand still, and you make money, and it can even go up and still make money.
And it’s got a fast data return. That’s the advantage of these. If you think we’re going to hang out here for a couple of days and then we might explode up or down, well, this gives you a little bit of wiggle room.
If we’re hanging around in the 50 or 100 point range and then we start moving up, this is fantastic.
That’s how they can be used. And if you want, you can even do something like this where it’s somewhat like a vertical spread. But look at this – you’re profitable if the stock stands still if the stock goes up or if it pulls back.
Compared to a vertical, you get way faster theta decay. The downside, of course, is it loses money very quickly here, and you have a lot more capital on hand. And that is because you have a higher chance of success since you’re already putting on this position. And it doesn’t even have to move for you to make money. But you have high theta returns. All that even if it doesn’t move in your direction in a couple of days or within a week, you’re out, you make about $200. Fantastic, isn’t it?
That’s my point in thought on these iron condors and butterflies. When would you use an Iron Condor? Well, when you believe the stock price is going to hang around in a certain range.
As far as a butterfly, when would you use that? Well, when a stock price is going to hang around a certain range. But remember, there are so many variations to these. Just like with an Iron Condor, you can skew it a little bit one way or the other. And just like with a butterfly, you could skew it one way or the other.
It’s not about putting things on always balanced. It’s about understanding how the market is moving, understanding the trade you want to put on, and now tweaking that trade based on your needs, on the stock, and based on the market conditions as well.
You have to realize that it’s not just about putting these things on, setting them and forgetting them, and letting them expire. It’s about tweaking them for the conditions that you have.
