Options trading allows us to make money even when stock prices remain stable. We discuss the distinctions between two neutral strategies, the Iron Condor and the Iron Butterfly, and share our preference between the two.
Contents
What Is an Iron Condor?
The Iron Condor is an options trading technique aimed at making money when the underlying stock has minimal price changes. It’s seen as a safer strategy with controlled risk and profit possibilities.
To successfully trade an Iron Condor, we should take the following steps:
- Purchase a lower strike Put option to safeguard against a significant drop in the stock price.
- Sell a higher strike Put option to earn some premium income from the trade.
- Buy a higher strike Call option for protection in case the stock price rises sharply.
- Sell a lower strike Call option to generate additional premium income.
What Is an Iron Butterfly?
An Iron Butterfly is a type of neutral options strategy that focuses on making gains when the price of the underlying asset fluctuates within a narrow band.
When trading an Iron Butterfly, we will execute the following steps:
- Sell an at-the-money (ATM) Call option to receive a premium. If the stock price rises significantly, the buyer has the right to purchase the stock from us at a lower price.
- Sell an at-the-money (ATM) Put option to receive a premium also. If the stock price declines a lot, the buyer has the right to sell the stock to us at a higher price.
- Buy an out-of-the-money (OTM) Call option to partially offset the risk of the short ATM Call option.
- Buy an out-of-the-money (OTM) Put option to offset the risk of the ATM short Put.
Differences Between an Iron Condor and an Iron Butterfly
The Iron Condor and Iron Butterfly are popular neutral strategies in options trading. Although they have similar structures, there are important distinctions between the two.
In trading an Iron Condor, the strategy involves selling out-of-the-money (OTM) options, which means the strike prices are further from the current market price. This setup boosts the chances of earning a profit.
An Iron Butterfly starts with selling two at-the-money (ATM) contracts, which can lead to a higher maximum profit potential. However, as the stock price moves, one of the sold contracts will always end up in the money, meaning it will be exercised unless it’s repurchased before expiration.
In contrast, with an Iron Condor, as long as the stock price stays between the strike prices of the contracts, traders can let the options decay in value until they expire worthless. This is why Iron Condor traders typically don’t need to adjust their positions very often.
| Iron Condor | Iron Butterfly | |||
|---|---|---|---|---|
| Maximum profit | Low | High | ||
| Range of profitability | Wide | Narrow | ||
| Adjustment frequency | Low | High | ||
Both strategies can be profitable when the stock price stays fairly stable, but the Iron Condor provides a broader profit range. This allows it to remain profitable even with a bit more price movement. As a result, many traders tend to favour Iron Condors over Iron Butterflies.
How to Find Profitable Iron Condors
We use the Options Scanner to find high-probability neutral opportunities.
- To allow theta to decay sufficiently, we will filter for stocks that expire next month.
- The stock should have an IV Percentile of at least 67% to indicate that the stock's implied volatility has been higher than most of the past year, suggesting a greater likelihood of IV contraction, which will help reduce vega.
- To minimise the impact of earnings reports on option prices, we will only consider stocks that are more than 30 days away from their earnings release date.
Among the stocks that meet these criteria, we will further rank them based on the Return on Capital (ROC) of Iron Condors to identify potential neutral trading opportunities with the highest expected returns.
Best Iron Condor Options to Trade
By using the Iron Condor ROC ranking, we can identify the current low-risk Iron Condors with the highest return on investment at 0.20 delta.
| Symbol | Last | IV | IV Perc | Strangle Details | Iron Condor BP | Iron Condor ROC | Days To Earnings | Expiration |
|---|---|---|---|---|---|---|---|---|
| TSLA | $220.59 | 52% | 75% | C280(0.20) P190(-0.19) | $335 | 49.25% | 57 | 2024-10-18 |
| UNH | $580.85 | 21% | 70% | C630(0.20) P540(-0.20) | $675 | 48.15% | 56 | 2024-10-18 |
| NOW | $838.22 | 34% | 67% | C920(0.21) P760(-0.19) | $690 | 44.93% | 64 | 2024-10-18 |
| JPM | $214.52 | 23% | 79% | C235(0.14) P200(-0.19) | $382 | 31.06% | 52 | 2024-10-18 |
| NEM | $51.31 | 36% | 71% | C57.50(0.20) P45(-0.14) | $196 | 27.23% | 71 | 2024-10-18 |
| ASML | $926.18 | 47% | 98% | C1070(0.21) P830(-0.20) | $800 | 25.00% | 57 | 2024-10-18 |
| TSM | $171.85 | 45% | 92% | C210(0.15) P155(-0.20) | $813 | 23.00% | 58 | 2024-10-18 |
| MU | $107.98 | 46% | 83% | C135(0.17) P92.50(-0.18) | $408 | 22.40% | 37 | 2024-10-18 |
| TXN | $202.54 | 37% | 91% | C230(0.11) P185(-0.20) | $860 | 16.35% | 63 | 2024-10-18 |
| CMG | $51.93 | 32% | 79% | C60(0.19) P45(-12) | $435 | 14.94% | 64 | 2024-10-18 |
Right now, the Iron Condor strategy with the highest return on investment at a lower risk is TSLA. You can create a 0.20 delta Iron Condor by:
- Selling a $190 Put that expires on 10/18.
- Buying a $185 Put for the same expiration.
- Selling a $280 Call that expires on 10/18.
- Buying a $285 Call for the same expiration.
This setup will require $335 in purchasing power.
If TSLA's stock price remains within the strike prices of the sold options until expiration, you could potentially see a profit of up to 49%.
Compared to Iron Butterfly, we prefer the wider profit range of Iron Condor, which also requires fewer adjustments. You might also want to use the Options Scanner to identify low-risk, high-reward neutral trades.
