To diversify one’s investment portfolio, switching from trading stocks to trading derivatives (options and futures) uncovers a new set of trading tactics that are particular to that derivative’s transaction. The iron butterfly option and the iron condor option are two examples of such option trading methods. This article will offer a quick introduction to two sophisticated option trading techniques, defining the iron condor vs iron butterfly and comparing them to highlight the benefits and drawbacks of picking one approach over the other.
The great iron butterfly
The iron butterfly is an options trading technique that seeks to benefit from the movement of futures and/or options that perform their tasks within a set range by using four different contracts. The key to success with this technique, which is designed to gain from a decrease in implied volatility, is to anticipate a region at a time when the value of options is likely to be down.
Two put options and two call options comprise the iron butterfly options trading technique. The calls and puts are distributed among the strike prices and all have the same expiry date.
A trader will use the following steps to implement this trading technique.
- The trader determines the projected price.
- The target price is then projected using options that are about to expire.
- A call option is purchased much over the strike price.
- Both call and put options are traded based on the closest price and strike price.
- Traders buy a put option below the target price to protect themselves against the underlying assets’ decrease.
The irregular condor
The distinction between an iron condor and an iron butterfly is that the iron condor uses four options, including two put options and two call options (one long and one short, each option type), as well as four strike prices. The iron condor strategy, like the iron butterfly strategy, has the same expiry date for its strike prices. The goal of traders using this technique, and the distinction between an iron condor and an iron butterfly, is to benefit from a market with reduced volatility.
How does it work?
- The trader first buys an oum (out of money) option with a strike price lower than the current price of the underlying asset. This is done to assure coverage in the event that the underlying asset’s price falls.
- The trader then sells the oum with a strike price close to the underlying asset’s price.
- An otm or atm is sold at a strike price greater than the underlying asset’s price.
- The trader then purchases a single otm with a strike price higher than the underlying asset.
Most people would agree that, despite the differences between iron butterfly options and iron condor options, both strategies have a lot in common, since they both need comparable criteria to succeed in making a profit. Both the iron condor and the iron condor trading techniques have advantages and disadvantages that vary depending on investment and time considerations. However, these tactics must always be used with prudence since they need a thorough grasp of the industry.