I want to talk about
- How to create an Iron Butterfly using an Iron Condor
- Create a butterfly risk profile with an Iron Condor
- A couple of advantages and exciting things to do Iron Butterfly
As we go into this trade setup, take a look at the butterfly. This is what it's going to look like. Let me start this from scratch and show you how it works.
Here we have Amazon if we take a look at the Amazon chart here around 1493 and let's say I'm projecting and move down to about let's say 1400. I could set this up in a couple of ways, and I'm just going to use the 49-day option.
I'll go ahead, and right-click buy a butterfly. You can see it's all puts here. These are all puts, so I have this 1400, I have two contracts that I'm selling. And then I'll buy my wings, let's say about 30 points out, maybe 40 points.
We analyze the trade right here.
You can see our current prices is right here. As this moves, you can see we have this little curvature. The most that we make is at this tip. Usually doesn't pan out and it doesn't work out, but if you look at how this white line moves, you can see it goes outside the range.
So as time expires, you can see that we get even all the way over to about 1270 where we're still kind of profitable.
After about a month, you can see I can make about $290, but I'm risking only about $400. So it's almost a two-to-one risk to reward ratio if it moves in my favor. If it does get down, even overshoots and then slowly comes back, this graph can continue to explode right here really, and that's the power behind it. You could be up to $1,100 right here towards the end by only risking about $400 in the capital.
Even if it's not working out and then the stock hangs out and if you get out of it early enough, you're only risking about 177.
At some points, even if it's hung out here for a month and didn't also go up, you just get out at maybe 50 bucks where you're profitable like a scratch trade.
That's the way the trade works.
Adjusting a butterfly's a little tricky for some people, they believe it's a bit tricky, and they're more comfortable with Iron Condors.
Let me show you how this works with an iron Condor
Typically, when you set up an iron Condor, it's going to be very similar. Let's say we sell an Iron Condor. Most people think of Iron Condors as pretty much looking like this. You have kind of two verticals on each side. This is what most people do to set up an Iron Condor. You're trying to confine the prices inside this range, and then trying to get them to expire.
The curvature still kind of works in the same way as a butterfly. You still have that curvature that works and functions with time decay.
The main difference here though is you have these two points that are spread out. What you could do is bring these points into the center right here. When you bring those in, that creates your Butterfly.
The main difference is one you have puts and calls and the other you have called in or just puts.
You can see that on this one, the curve is a little bit set up okay whereas on this one just because the market's not open yet, the option prices might be a little bit skewed up until it the opening bell. Otherwise, you know it works in a very similar way. It's the same thing.
If you're wondering which one is better, no one is better than the other. But I find that some people they like adjusting the Iron Condor Butterfly a little bit easier because then if something happens what they'll do is they may move the call side right here. They'll take the call side off and move it over a little bit. So, they start adjusting it that way because you can change the vertical. It may sound a little easier.
The same thing, if it starts overshooting, you take this side off and then you'll readjust it by putting on a new one further out.
That's one way to think about it, but otherwise, if you like to play with it with an iron condor, you can do so. Sometimes getting filled in it is also a little bit easier because maybe you're out of the money and the money on some contracts.
But usually, if you're trading liquid vehicles, it's not a problem. Overall, it's just a different way to do the setup. Just which one you feel more comfortable with. But I want to share with you this variation because for some people adjusting makes it easier. Contract-wise, you're not paying anything different because here you're using four contracts here you're using four contracts, it's just that this one is all puts and this one is puts and calls.
Which one is better may just depend on your personal preference. There's a little more flexibility here; I'd say, with the Iron Condor Butterfly just because you could manipulate things a little bit differently.