It might be challenging to find the correct choice structure to communicate your point of view.
It may be difficult with so many diverse combinations and elaborate names. The iron condor and iron butterfly are two buildings that are extremely similar. Both convey a short volatility viewpoint, although there are some minor differences between them.
In this article, we will look at iron condor vs iron butterfly similarities and contrasts. Then we’ll practice deciding which one is the greatest.
A short iron condor is formed by selling one out of the money (OTM) strangle and then purchasing another otm strangle (wings) to provide downside protection.
An iron butterfly, on the other hand, is constructed by selling an at-the-money (atm) straddle and then purchasing another otm strangle, as illustrated below.
What is my point of view regarding these trades?
These structures seem to be pretty similar when seen visually. The structures convey almost comparable points of view.
Volatility is short
By entering this trade, we indicate that we believe the implied volatility on the underlying is overvalued. Simply stated, we believe the stock will move less than what the market anticipates. We also have our losses limited to protect ourselves if we are incorrect. This is due to the position’s extended wings on each side.
Our first encounter with Greeks was as follows for both structures:
Short gamma, short Vega, long theta, delta neutral
Before delving into the distinctions and when to favor one trading structure over another, it is vital to note that this is your opinion.
Consider yourself to be a rug marker. Knowing the annoyance of the textiles and bargaining to obtain the best price is advantageous.
However, doing so when you don’t even want a rug is counterproductive.
You can find yourself hauling a rug you didn’t want to begin with.
The same is true for options. If we do not want to communicate our views on volatility, we simply do not make the transaction.
Profit percentage vs. Risk/reward ratio
The first thing we observe is that the profit zone of the iron condor is larger than that of the iron butterfly. We have a lot wider pricing range to earn our entire credit profit when it expires.
In comparison, the iron butterfly has a bigger beginning credit and consequently a higher maximum profit. If the stock remains unaltered, the iron butterfly will outperform the iron condor. However, getting that full return would need the stock actually pinning to the straddle price, which is quite improbable.
Neither is fundamentally superior to the other.
Smaller but more regular winnings or larger but less frequent winners
The anticipated value is the same.
Because the iron butterfly sells options at the money, it will have a greater Vega exposure at inception than the iron condor.
This implies that the iron butterfly will gain or lose money for every point change in implied volatility. This is because changes in Vega have the greatest impact on atm possibilities.
This helps us to be more responsive to the brief Vega we desire at the start. To have the same Vega exposure, we could sell more iron condors.