Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management

Chapter 19. The Iron Butterfly and the Condor

The Iron Butterfly was an American psychedelic rock band formed in 1966, best known for the 1968 hit "In-A-Gadda-Da-Vida, "which sold 25 million copies.

The iron butterfly spread is an options investment strategy that is not psychedelic.

The iron butterfly is a variant of the butterfly trade discussed Chapter 18, and it is an investment method for options that provides both limited risk and modest prospects for profit. The same can be said for the condor. Both the iron butterfly and the condor serve to protect your investments when the markets start to behave like a 1960s heavy metal bass guitar player. The difference between a regular butterfly and the iron butterfly is that the iron butterfly mixes put and call contracts. With a condor spread, the strike prices on the call or put contracts in the middle do not match, as they would in a long or short butterfly.

An iron butterfly probably wouldn't fly very well (too heavy), but that's not the point. As an investment strategy, it builds on the discussion from Chapter 18 by providing safety in a volatile market. The condor is ironically named too; far from soaring, the purpose of the condor strategy is to keep you close to earth. The names come from the way in which the "wings" are formed. An iron butterfly creates an ironclad limit to risk because you hedge call and put contracts against each other, using a narrow range of strike prices. If you sell a $40 put and then buy a $35 put, the ...