Butterfly and Condor Spreads

I received a question recently about butterfly spreads.  I never write about them, despite the fact that many individual investors like to trade such spreads.


Definition:  An option strategy combining a bull and bear spread such that these two spreads share a common strike price.  Frequently referred to as a 'fly.'

Example:  The options in a butterfly are either all calls or all puts.

Buy AAPL Nov 100/110/120 call butterfly:

Buy 1 APPL Nov 100 call

Sell 2 AAPL Nov 110 calls

Buy 1 AAPL Nov 120 call


Long the 100/110 call spread; Short the 110/120 call spread

Buy AMZN Dec 105/110/115 put butterfly:

Buy 1 AMZN Dec 115 put

Sell 2 AMZN Dec 110 puts

Buy 1 AMZN Dec 105 put

Similarity to Condor spread:

The butterfly is a condor.  The only difference is that there is a separation between the strike prices of the bull and bear spreads in the condor, and there is no separation (the spreads share one strike price) in the butterfly.


Condor Example:

Buy 10 SPY Jan 85 calls

Sell 10 SPY Jan 90 calls

Sell 10 SPY Jan 100 calls

Buy 10 Spy Jan 105 calls

In this condor, there is a 10-point separation.

Thus, the butterfly is similar to the condor.  They are both members of the family of spreads called 'winged spreads.'

Iron Condor

The condor is equivalent to the iron condor.  Why?

In the iron condor, instead of buying the bull call spread, the equivalent put spread is sold.  Thus, the iron condor is:

Buy 10 SPY Jan 85 puts

Sell 10 SPY Jan 90 puts

Sell 10 SPY Jan 100 calls

Buy 10 Spy Jan 105 calls

Because selling the Jan 85/90 put spread is equivalent to buying the Jan 85/90 call spread, these two positions are equivalent.

Going one step further, the butterfly is equivalent to an iron condor in which there is zero separation between the strike prices of the bull and bear spread.

Bottom line:  This is just another way of stating that iron condor traders can purchase a condor or butterfly and have a position that behaves similarly.  The chosen strike prices represent the real differences in how the spreads perform in the real world.


8 Responses to Butterfly and Condor Spreads

  1. Dave 10/30/2009 at 1:32 PM #

    Why is it then that iron condors seem to be chosen over regular condors?
    A few things I can think of is
    1. there’s more risk of possible assignment with the regular condor because of the ITM spreads
    2. a psychological benefit with receiving a credit
    Are those correct differences why IC might be preferred?
    Is there any other experiential difference when trading a regular condor and an iron condor?
    Thanks, Dave

  2. Mark Wolfinger 10/30/2009 at 1:51 PM #

    You got it.
    There is no reason to take assignement risk and people prefer to get cash in the accounts.
    Keep in mind that there is no assignment risk when dealing with index options (OEX is the exception), and there is nothing wrong with being assigned early – unless it results in a margin call. But why take the chance?
    There’s no other difference of which I am aware. The positions are equivalent – as long as the prics are not out of line.

  3. Dave 10/30/2009 at 2:32 PM #

    Thanks Mark.
    This gives me an opportunity to ask another question that I’ve been wondering about.
    Is an initial credit truly just a psychological preference?
    Meaning that since an equivalent position can be created with a debit or credit (i.e. a condor vs an iron condor), isn’t the net P&L, which is what I care about, completely independent of the initial credit or debit?
    Assuming it is psychological only, how does it fit in with the “mantra” of being a net seller of premium? I’ve assumed the statement of being a net seller of premium is meant to apply to the creation of a position. But in the end, it would seem it doesn’t matter if you initially buy premium (as in the case of the regular condor) or sell premium (as in the case of the iron condor). All that seems to matter is if you buy premium lower than you sell it. Hence, if my assumptions are correct, is the “prefer to be a seller of premium” statement referring to just a psychological preference and not a statistical advantage?
    Thanks, Dave

  4. Mark Wolfinger 10/30/2009 at 3:13 PM #

    If you sell a credit spread and collect $200, that is your maximum gain. You cannot collect more than your premkium, no matter what happens. When ytou sell a spread, it can only go to zero.
    If it’s a 5-point spread and you pay $300 for that position, the maximum gain is the same $200. It can never be worth more than $500, so your profit is capped.
    There is nothing pshcyological about it.
    Net seller of premium is often thought of as ‘collecting’ cash. But due to equivalency, that’s not always the way it is when looking at real dollars.
    To me, the term ‘premium seller’ means a position with negative theta and negative gamma.
    There is a preference among some to collect cash. But there is no statistical edge and no real advantage.
    Keep in mind that for the vast majority, some positions are easier to visualize than another. I’d prefer to sell a put spread than own a collar. Yet, they are the same positon.

  5. Dave 10/30/2009 at 7:13 PM #

    Right, so in your 5-point spread example, the max gain of $200 and max loss of $300 are the same in both the credit spread and debit spread. Since, they are equivalent then the only difference between them is the initial debit or credit. Hence, the choice of which spread to use is purely psychological. Correct?
    Thanks you gave the defintion of “net premium seller” I was looking for:
    “To me, the term ‘premium seller’ means a position with negative theta and negative gamma.”
    And that it is often interpreted as collecting cash, but really it doesn’t have anything to do with initial credit or debit, correct?
    Though it’s the defintion I was looking for, I’ll have to think about that Greek definition a little more to understand it.
    There’s 2 parts that are confusing to me
    1. Generally, I still haven’t figured out how one can refer to an entire position as ‘negative gamma’ because gamma changes based on the underlying. So, it can be be both positive and negative in the same position depending on the underlying price. No?
    2. Negative theta means you are losing money every day. So, is this meant that since you are short premium. 2 negatives = a positive and you profit every day from time decay?

  6. Mark Wolfinger 10/30/2009 at 7:57 PM #

    1) I cannot argue semantics, Dave.
    In theory a retail trader chooses which to trade, the credit spread or the debit spread.
    In reality, the floor trader has to take what he/she gets. If the market maker buys the call, then he sells the other call and takes the debit spread. No psychology – just doing the best you can with the trades you get.
    If you want to refer to choosing a ebit spread or a credit spread as a pshychological choice, I cannot argue.
    2) Yes. It has nothing to do with collecting cash, but if you try to convince others, you may have a problem. It’s easy to think of selling option premium in terms of cash, but we really buy risk when we sell premium, becasue we go short gamma and theta.
    3) Yes. But a position with negative gamma means it has negative gamma right now. It is not the same as saying that house is red. It will remain red until something special is done to change the color. The position has negative gamma now – but depending on the stock price, it could change to positive gamma. That is not a contradiction.
    When you trade, the position is most often breaking-even the moment you make the trade. But it can easily becomes profitable for awhile and then a loser for awhile. If you agree that the descritive adjective can change, then a position’s gamma can change from negative to positive – unless the entire position consists of a single option.
    4) Are you pulling my leg?
    a) Negative theta means that your options are theoretically worth less and less as time passes – when all else remains constant. You may not be losing money – depending on what happens to the underlying stock.
    If you own 100 calls and the stock rises 50 points, do you really believe that you had to lose money just because the theta was negative?
    b) Short premium means (without getting into the discussion over equivalent positions) that your position has negative gamma. It has negative gamma. There is no double negative.
    No one is trying to trick you.
    The language is meant to be as straightforward as possible.

  7. Dave 10/31/2009 at 10:20 PM #

    Thanks for your replies.
    No, I’m not pulling your leg and no that’s not what I believe. :) It’s just the weaknesses of the medium of text communication rearing its head.
    Every profession seems to have its own vernacular … I’m just not up on options speak yet, but I’m trying … hence these questions. :)
    I’m still a little fuzzy on a “net premium seller” = -gamma & -theta because when I look at the IC (or any of the equivalent condors), which I assume qualify as a “net premium short/sell”, I see the position as being -gamma & +theta when the position is opened. What’s wrong with this picture that I present? (why the disconnect with theta?)
    ps I thought of another reason why one might want to take an equivalent position besides a.) assignment b.) cash in pocket … and that’s volume and bid/ask spread.

  8. Mark Wolfinger 11/01/2009 at 9:15 AM #

    One problem is that there is no official nomenclature authority in the options world. And it’s far too late to try to get everyone to agree on terminology at this point. To me, the important point is to try to use words that make the meaning of a sentence obvious. Sadly that’s not always possible.
    You caught me in a big error. A premium seller someone who is SHORT gamma and has POSITIVE theta.
    This is a good, clear definition of a premium seller: A premium seller profits from the passage of time (positive theta) and loses when the market makes a big move (negative gamma).
    That’s the example I should have used because it clearly states the benfits and risk of being a premium seller.
    Thanks you for delving further into this situation.
    Your postscript is correct. The ease of making the trade coupled with the probability of getting a good price makes a big difference.

Please share your thoughts.