Today, our Head Trader, Robb Reinhold, answers several questions from one of Maverick's traders about the differences between condors and butterflies.*
-----Original Message-----
From: Aaron J.
Subject: Butterflies and Iron Condors
I have a couple of questions after yesterday's Advanced Options class.
First, I understand the differences between the two strategies as far as mechanics of the trade. However, is there really any difference between employing a condor over a butterfly or vice versa? Is it personal preference or situation (i.e. pricing, risk/reward...)? Personally, if I am going for a neutral trade, then I like the condor. However, if I want to bias my trade to one side, then I like using a broken wing butterfly.
Next, it was mentioned in class that there are call, put and iron condors/butterflies. At what times would it be beneficial to do a call or put condor/butterfly, especially since iron trades allow for adjustments.
Finally, to finish up the year, I am looking to do a few condors/butterflies after December expiration – due to following a high volatility week as well as a lull in trading activity since it will be a holiday week (at least that is my reasoning). Just from your observations, has the week around Christmas and New Year's Day been a good week for these type of trades? Granted, I know that past performance does necessarily predict future market activity. So, as always, I will trade based on the market.
Sorry for the long email...I just thought of a couple questions as I reviewed yesterday's class.
Aaron J.
-----Reply Message-----
Hi Aaron,
Is there really any difference between employing a condor over a butterfly or vice versa?
The biggest difference is how wide the break-even points are and the top or max gain of the trade. If you can really pin the price at expiration to a point, then the butterfly is a superior trade since it gives a better reward/risk. However, your break-evens will be much tighter in the case that you are wrong. On the other hand, the condor gives you a much wider range and you don't have to be spot on with the price action.
Is it personal preference or situation (i.e. pricing, risk/reward...)?
To me, it depends on the underlying stock and market conditions. It is extremely difficult to call a closing price on a highly volatile stock, whereas calling the closing price on a low volatility stock is much more likely. It comes down to whether I want to play a tight range (in which I play the butterfly for the better reward-to-risk) or a wider area (where the break-evens are further apart).
At what times would it be beneficial to do a call or put condor/butterfly?
I can't really think of a time when one would be beneficial over the other since options pricing should be the same across the board. However, in real life, there are fluctuations and temporary mispricing that may give you a better price for one over the others. You could always run the numbers for all three (call, put, iron) and see which one is the best. However, that doesn't always mean that you will get executed there. There have been times when I thought I spotted an opportunity, but in the end could never get a fill at that price.
Hope this helps,
Robb
* NOTE: Some original wording has been slightly modified for legibility.
