The “Iron Condor” as well as the "Iron Butterfly " also known as "Iron Fly " are 4 leg option Strategies which means. there are 4 options involved in both of the strategies. The iron Condor involves a slight OTM (Out of The Money) Short Strangle and an OTM long strangle to hedge the Naked Strangle, whereas, in the Iron Fly, an ATM (At The Money) Short Straddle is executed along with an OTM long strangle as a hedge. Both the strategies are used when the overall market outlooks seem to be sideways or neutral. The maximum profit & Loss is capped in both of the strategies the Iron Butterfly can yield slightly higher profit as compared to the Iron Condor in the underlying asset expires as desired by the trader.
Difference between "Iron Condor "& “Iron Butterfly”-
Iron Condor-
The Iron Condor is a multi (4) leg option strategy that includes a Short Strangle and buying two slightly OTM (Out of The Money) Call & Put Options to hedge the overall position. It is a net Credit strategy and the overall Profit & Loss is capped in this Strategy. This strategy eliminates the risk of an unlimited loss in the Short strangle and gives a decent RR (Risk to reward) ratio. An Iron Condor is a non-directional strategy and is implemented when the market outlook is sideways, to benefit from the falling IV (Implied volatility) in option premiums.
This is the Payoff graph of the Iron Condor-
Iron Butterfly-
Iron Butterfly is a 4 legged option strategy that is also known by the name “Iron Fly”. This strategy is implemented by a total of 2 Call options and 2 Put options. First, an ATM (At The Money) Short Straddle is executed that involves selling 1 Call & 1 Put option of the same strike price of the same expiry. The second part is to Buy a slightly OTM (Out of The Money) Call option and a slightly OTM Put option to mitigate the overall risk of the Short straddle. This is implemented in a similar scenario as the Iron Condor but the trader expects the expiry around the Straddle sold in this strategy. The RR ratio in this strategy is better than that of Iron Condor.
This is the payoff graph of iron Butterfly or the “Iron Fly”-
As seen in the above graphs, it can be clearly seen that the overall strategies are mostly the same as both the strategies are implied when the market outlook is neutral or sideways.
The Total profit potential is higher in the Iron Fly than the Ion condor but the chances of Maximum profit is more in the Iron Condor as the range is wider for the maximum potential profit.
Difference-
- The main difference between an Iron Condor & Iron Butterfly is the Zone of Maximum Profits. In the case of an Iron Condor, the maximum profit is earned when the Underlying asset expires within the range of the Short Strangle. Whereas in the case of an Iron Butterfly the maximum profit is obtained when the underlying asset expires at the Strike price sold in the middle.
- The margin of safety is higher in an Iron Condor as there is a 100-200 range to earn the maximum profits whereas in Iron Butterfly the margin of safety is very less as the maximum profit will be obtained when the expiry is at the Strike price sold by the trader. The base of an Iron Condor is a Short Strangle whereas the base of an Iron Butterfly is a Short Straddle.
- In an Iron Condor the trader has to forecast a range within which the underlying asset would expire which requires a moderate amount of skills. On the other hand in an Iron fly, the trader forecasts the exact strike price on which the underlying asset will expire. Identifying the exact strike price needs a Lot of skills and thus this strategy is fairly difficult to implement profitably.
- The minimum loss and the Break-even is more in the Iron Condor comparatively than Iron Butterfly. Whereas in the Iron Butterfly the Break-even is small as well, the maximum profit is greater in the case of the Iron Butterfly Strategy compared to the Iron Condor.
So to conclude it can be said that both the strategies are the best at their respective places. There are certain differences in them that make it unique to use for different scenarios. The overall profit is more in the Iron Butterfly as compared to the Iron Condor but the maximum Probability of profit is more in the Iron Condor.