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A summary of the iron condor and the butterfly spread
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Check out this video for a summary of the iron condor and the butterfly spread.
Let’s first take up the iron condor. This is a market-neutral options trading strategy, meaning that it can be used when the market is neither trending up nor trending down. While the strategy minimizes downside risks, it also tends to put a cap on the upside. To set up an iron condor strategy, you need to execute 4 trades. You must sell 1 lot of out of the money (OTM) put options. And sell 1 lot of out of the money (OTM) call options. Then, you must buy 1 lot of further out of the money (OTM) put options. And buy 1 lot of further out of the money (OTM) call options. Up next, we have the butterfly spread. This strategy combines two other spread strategies, namely the bull spread and bear spread. It is also a market-neutral strategy that works best when the market itself has low volatility. A butterfly spread involves four options contracts with three different strike prices, but with the same expiration date. All of the three strike prices should be equidistant from each other. There are five major variants of butterfly spreads, namely the long call butterfly spread, the short call butterfly spread, the long put butterfly spread, the short put butterfly spread, and the iron butterfly. In the next chapter, we’ll be taking up one of these - the iron butterfly - to study its details. Keep reading, and keep learning with Smart Money!