🎯 In 30 seconds: An iron condor is a bull put spread plus a bear call spread on the same stock and expiration. You collect a credit and keep it all if the stock stays between the two short strikes. A butterfly aims at one exact price and pays the most if the stock finishes right there. Both are bets that the stock stays calm. Both have capped losses, but the loss is usually larger than the profit, and a single big move can erase several months of wins.
Neutral strategies in plain words
Most trades need a direction: up or down. A neutral strategy makes money when the stock goes nowhere much. You are not betting on a price. You are betting that the market's expected move, built into option prices as implied volatility, is bigger than what actually happens. See Implied volatility.
The way you get paid for that bet is time decay. Options lose value as expiration approaches if the stock does not move (see The Greeks, theta). Condors and butterflies are built so that time decay mostly works for you, and a large move works against you.
Both are made from the vertical spreads in the previous chapter. If you are comfortable with those, these are just two verticals side by side.
The option prices used here
Same hypothetical stock at $100 and the same 30-day chain as the vertical spreads chapter. Prices are consistent with each other but not real quotes.
| Strike | Call | Put |
|---|---|---|
| $90 | $11.10 | $0.80 |
| $95 | $7.10 | $1.80 |
| $100 | $4.00 | $3.70 |
| $105 | $1.80 | $6.45 |
| $110 | $0.70 | $10.35 |
The iron condor
Four legs, one expiration:
| Sell the $95 put | +$1.80 |
| Buy the $90 put | -$0.80 |
| Sell the $105 call | +$1.80 |
| Buy the $110 call | -$0.70 |
| Net credit | $2.10 ($210) |
The put side is a bull put spread. The call side is a bear call spread. The stock can only be below one of them at expiration, so only one side can lose. That is why the max loss is one wing's width minus the total credit, not both wings.
- Max profit = net credit x 100 = $210, anywhere from $95 to $105.
- Max loss = (wing width - credit) x 100 = ($5 - $2.10) x 100 = $290, below $90 or above $110.
- Lower breakeven = short put strike - credit = $95 - $2.10 = $92.90.
- Upper breakeven = short call strike + credit = $105 + $2.10 = $107.10.
Worked endings: at $100, all four options expire worthless and you keep $210. At $109, the $105 call costs you $400, the other three expire, and $210 - $400 = -$190. At $120, the call spread is at its full $500 loss, so $210 - $500 = -$290.
OIC lists this trade as the "short condor (iron condor)". The word "short" refers to the fact that you sell the middle strikes and receive a credit.
The butterfly
A long call butterfly uses three strikes, evenly spaced, all calls:
| Buy 1 $95 call | -$7.10 |
| Sell 2 $100 calls | +$8.00 |
| Buy 1 $105 call | -$1.80 |
| Net debit | $0.90 ($90) |
- Max profit = (wing width - debit) x 100 = ($5 - $0.90) x 100 = $410, only if the stock closes exactly at $100.
- Max loss = debit = $90, at or below $95 or at or above $105.
- Breakevens = lower strike + debit = $95.90, and upper strike - debit = $104.10.
Check one point: at $102, the $95 call is worth $7, the two short $100 calls cost $4, the $105 call is worthless. $7 - $4 - $0.90 = $2.10, or +$210.
The payoff ratio looks great: risk $90 to make $410. The catch is the shape. The peak is a single point. The chance the stock closes exactly at $100 is small, and most of the time you finish somewhere on the slopes or the flat loss.
The iron butterfly
An iron butterfly builds the same shape from puts and calls and pays you a credit instead:
| Sell the $100 call and the $100 put | +$7.70 |
| Buy the $105 call | -$1.80 |
| Buy the $95 put | -$1.80 |
| Net credit | $4.10 ($410) |
- Max profit = credit = $410, at exactly $100.
- Max loss = (wing width - credit) x 100 = ($5 - $4.10) x 100 = $90.
- Breakevens = $100 - $4.10 = $95.90 and $100 + $4.10 = $104.10.
It has exactly the same profit, loss and breakevens as the long call butterfly. That is not luck. When option prices obey put-call parity, two positions with the same payoff at expiration must cost the same once you account for cash, otherwise traders could profit risk-free by buying one and selling the other. See How options are priced.
Condor or butterfly?
| Iron condor | Butterfly | |
|---|---|---|
| Profit zone | A wide range ($95 to $105 here) | A peak at one price |
| Max profit vs max loss | $210 vs $290 | $410 vs $90 |
| Breakeven range | $92.90 to $107.10 | $95.90 to $104.10 |
| Typical outcome | Wins often, small; loses less often, larger | Loses small often; wins big rarely |
The condor's breakeven win rate is easy to work out. If every trade ended at either max profit or max loss, you would need to win $290 / ($210 + $290) = 58% of the time just to break even, before costs. Real trades end in between, but the point holds: a high win rate is required, not a bonus.
When they tend to work, and when they do not
- Implied volatility is high and then falls. You sell options when they are expensive. If the expected storm does not arrive, their prices drop and you can buy back the position cheaply.
- Time passes with no big news. Each quiet day is a little decay in your favor.
- They struggle before scheduled events. An earnings report, a drug approval decision or a court ruling can move a stock more than the wings in one night. The market knows that, so the premium is higher, but you still take the gap. See Earnings season.
- They struggle in trends. A stock that grinds up steadily for a month can walk right through the short call strike without any single scary day.
Managing a condor that is in trouble
Suppose the stock jumps from $100 to $106 two weeks in. Your $105 call is now in the money. You have three honest choices:
- Close the whole position and take the loss so far. Simple and final.
- Close only the threatened side (the call spread) and keep the put spread, which is now almost worthless and will likely expire. You are no longer neutral, so do not pretend you are.
- Roll the call spread higher or to a later expiration for a credit or small debit. This is a new trade with new risk. It can turn a defined small loss into a bigger one if the stock keeps going.
There is no rule that you must "defend" a position. A position that no longer fits your view should usually be closed, not repaired.
The risk of a big move
A condor collects $210 a month in the good months. One overnight move to $115 costs the full $290, which wipes out almost one and a half good months. Two in a row, and a year of patient small wins can be gone.
Also watch for early assignment on the short legs. Equity options are usually American style, and a short call can be assigned early just before an ex-dividend date. And watch pin risk at expiration if the stock closes near a short strike: you may wake up Monday with 100 shares you did not plan to own. Cash-settled, European-style index options remove early assignment. See Index options.
Try it
Choose a stock or index ETF from your Watchlist with no earnings report in the next 45 days. On a chain about 30 to 45 days out, build an iron condor with short strikes roughly one expected move away and $5 wings, and a butterfly centered at the current price. For each, write in your trading journal the credit or debit, max profit, max loss, both breakevens and the break-even win rate. Check them weekly until expiration and record what you would have done at each check.
- What is an iron condor made of? Answer: A bull put spread plus a bear call spread on the same stock and expiration.
- An iron condor with $5 wings collects a $2.10 credit, with short strikes at $95 and $105. What are the maximum profit, maximum loss and breakevens? Answer: Maximum profit $210 (anywhere from $95 to $105), maximum loss $290, breakevens $92.90 and $107.10.
- If every condor trade ended at either the $210 maximum profit or the $290 maximum loss, what win rate would you need to break even? Answer: 58% ($290 / ($210 + $290)), before costs.
- A platform shows a condor with a "70% chance of profit". Why is that not a reason to trade it? Answer: The figure comes from a model and current implied volatility. It says nothing about expected value and ignores the size of the losses. Look at the max loss in dollars and size for it.