Iron Condor vs Butterfly: Two Ways to Sell a Quiet Market

Both trades make money when a stock goes nowhere. They disagree about how precisely it has to go nowhere. An iron condor accepts a wide band of prices at expiration and collects a modest credit for the privilege, while a butterfly bets that the stock will finish close to one price and pays out several times its cost if it does, so choosing between them means deciding how much you trust your own estimate of where the stock will sit.

Building the condor

Start from what the earlier lesson on verticals covered. An iron condor pairs a bull put spread under the stock with a bear call spread over it, both in one expiration.

Take a hypothetical stock trading at $100. You sell the 95 put and buy the 90 put. On the call side, sell the 105 and buy the 110. The chain gives you a total credit of $1.60 for the four legs.

Why is the loss only one width? The stock cannot finish below $90 and above $110 at the same time. Only one side can be fully lost, so the credit from both sides offsets it.

You risk $340 to make $160. The trade profits anywhere between $93.40 and $106.60, a band $13.20 wide. That wide band is what you are buying with the poor ratio.

Building the butterfly

A call butterfly uses three strikes. Buy the 95 call, sell two 100 calls, buy the 105 call. Suppose it costs $1.00.

Risk $100 to make up to $400. The catch is the shape. The $400 only arrives with the stock at exactly $100 on expiration day, and the profit shrinks steadily as the finish moves toward $96 or $104. Outside that band of $8 you lose the whole $1.00.

Side by side

	Iron condor 90/95/105/110	Butterfly 95/100/105
Opens for	$1.60 credit	$1.00 debit
Maximum profit	$160	$400
Maximum loss	$340	$100
Profit zone at expiration	$93.40 to $106.60	$96.00 to $104.00
Where it pays most	Anywhere from $95 to $105	At $100 only

Read the table as a trade-off. The condor wins in more places and loses more when it loses. The butterfly loses in more places, and when it loses it loses little.

What they do before expiration

The payoffs above are expiration payoffs. Before then, both trades move much less than the diagrams suggest.

Take the butterfly with the stock sitting on $100 and a few weeks still to go. The short 100 calls carry plenty of time value, and that time value is a liability to you, so the spread may trade barely above the $1.00 you paid, even though the stock is exactly where you want it. Most of a butterfly’s gain arrives in the final days, when the short calls’ time value collapses. That is also when a small move in the stock swings the value hardest.

The condor behaves more gently. Its credit shrinks a little each day while the stock stays between the short strikes. A move toward one short strike starts to hurt well before the stock reaches a break-even.

Patience pays both trades. It also exposes both to the move you hoped would not come.

Choosing between them

Ask how specific your view is. If you think the stock will stay in a range, say between the recent support and resistance on the chart, and you do not have a view on where inside it, the condor matches the idea. If you have a reason to expect a particular price, such as a stock that has pinned a heavily traded strike into several expirations, the butterfly pays you for that precision. A butterfly spread is the cheapest way to be precisely right makes the full case.

Sizing works differently too. With a $300 risk limit per trade, one butterfly at $100 fits three times over. A single condor at $340 does not fit at all, and narrowing its wings to cut the risk will also shrink the credit.

Choosing the short strikes of the condor is the same job as choosing strikes for any credit spread, done twice, and how to choose strikes for a credit spread goes through the delta and credit trade-off. The options hub lists the other structures.

Neither trade runs itself. The lesson on managing a spread covers the exits you set before you open one, and what a roll costs.