Which is Superior, the Iron Condor or the Iron Butterfly?
By Space Coast Daily // May 19, 2022
As an options trading tutor, people often asked, “Which is better, iron condor vs iron butterfly?” these are both short Vega bets, which means they profit from volatility reduction; However, the structure is different, as are the merits and downsides of each.
The iron condor is one of the most common option spread trades. The structure involves selling a call vertical and a put vertical that are both out of the money, generally by multiple strikes. This is referred to as a “strangle.”
A lower risk, lesser return position is an iron condor. An iron butterfly is a position with greater risk and a higher payoff. An iron butterfly might earn more premiums than an iron condor since its short bets are positioned close to or at the asset’s current price. If everything works well, you can always earn more money with an iron butterfly. If you anticipate extreme volatility, this is the technique to use.
An iron condor compensates for its decreased earning potential by including a safety net. You establish your short positions some distance away from the current price of the asset. This implies they’re worthless, so you receive less money when you sell them, but it also means the asset’s price may fluctuate without causing your position to lose money.
The advantage of this technique is that it has low volatility and a larger range for the price to move in before you run into difficulties with the deal.
This is an excellent strategy for greater volatility markets and if you believe the price needs more space to move.
Which is superior?
The iron condor would be preferable to the narrower strike iron butterfly. The disadvantage of utilizing an iron condor is that it is more difficult to fix when it goes against you, and/or you may lose more money since you took in less premium by selling options that were farther from the money.
Overall, though, it has a higher likelihood of profit than the iron butterfly.
The iron butterfly trade also benefits from lesser volatility. It is constructed by selling at-the-money call verticals and putting verticals with variable long wing widths.
The iron butterfly has narrower structures than the iron condor, but it has a superior risk-to-reward ratio since your return may be far greater on the money at risk than with the iron condor.
This is because you earned a higher premium when you sold the at-the-money options. Because of its better risk/reward ratio, the iron butterfly may be used in a broader spectrum of markets, including moderate and high volatility.
Even though it has low volatility, it performs well in low volatility markets due to the risk-reward ratio.
Of course, for any of these trades to be lucrative, the price must remain inside a certain range. The iron condor provides greater space, while the iron butterfly provides less space for the same price. However, due to the increased risk-reward, I favored the iron butterfly in most markets.