butterfly spreads and iron condors are similar to each other, when to apply which. Eg- if I expect the price to stay in a range I can either create a long call/put butterfly or iron Butterly (or even an iron condor (for a wider range)).
but my question when to apply which (long call/put butterfly or iron Butterly) as they have a similar payout
Posted by Walker491
3 Comments
If you have the cash to pay for it (ie, it won’t create your cash to go negative) the regular call or put fly will result in slightly better performance than the iron fly.
Like any trade it depends on what kind of return profile you’re looking for. For example, some people prefer condors over butterflies around events likely to produce big moves (like earnings) because a ~0% move is rare. The condor spreads the return density evenly out across the full strike width whereas the butterfly concentrates it in the middle.
Until you get into an early exercise situation, they don’t have a similar payoff, they have the same exact payoff. When you introduce nonzero rates the math gets ever so slightly trickier, but they’re still the same economically. If I sell the 9/10/11 iron fly for .75, I’m selling the 9/10 put spread and the 10/11 call spread. If I then pay 1 for the 9/10 box, I buy back the 9/10 put spread and also buy back the 9/10 call spread. So now I’m long the 9/10 call spread and short the 10/11 call spread (ie. long the call fly) and I’ve paid 0.25. Max I can make in either scenario is 0.75 and it’s when the underlying expires at 10.