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Iron Condors and Iron Butterflies - Part 1

Jul 5, 2024

Webinar Notes: Iron Condors and Iron Butterflies - Part 1

Presenter

  • Name: Matt Hachman
  • Role: Principal of Investor Education at OCC, Options Industry Council Instructor
  • Experience: Trading since 1998 in Chicago and London, ran an index options market-making operation at CBOE, currently educates on risks and benefits of exchange-traded options.

Overview

  • Topic: Iron Condors and Iron Butterflies
    • Break down vertical spreads
    • Discuss potential risks and rewards
    • Suitable alignment with investment goals
  • Background: Options involve risks; content is for educational purposes only.

Vertical Spreads

General Concept

  • Definition: Spread transaction involves buying/selling two or more positions, usually in the same underlying with different strike prices.
  • Types: Call spreads and put spreads.
  • Defined Risk and Reward: Buys and sells an option, typically involves the same expiration.

Call Credit Spread

  • Motivation: Neutral/Bearish
  • Structure: Sell a higher strike call, buy a lower strike call.
  • Max Gain: Credit received.
  • Max Risk: Difference between strikes minus the credit received.
  • Break Even: Short strike plus the credit received.
  • Position Monitoring Critical: Due to potential assignment risk on the short call.

Put Credit Spread

  • Motivation: Neutral/Bullish
  • Structure: Sell a lower strike put, buy a higher strike put.
  • Max Gain: Credit received.
  • Max Risk: Difference between strikes minus the credit received.
  • Break Even: Short strike minus the credit received.
  • Position Monitoring Critical: Due to potential assignment risk on the short put.

Combining Spread Strategies

Iron Condors

  • Definition: Combines a call credit spread and a put credit spread on the same underlying and expiration month.
  • Motivation: Expect stock to stay within a specific range.
  • Max Gain: Combined credit received from both spreads.
  • Max Risk: Distance between strikes minus the combined credit received.
  • Break Even Points: Adjusted by the total premium received.
  • Position Monitoring Critical: Especially close to expiration dates and strike prices.

Example - Iron Condor

  • Scenario:
    • XYZ trading at 88.5
    • Sell 90-95 call spread for $1.70
    • Sell 80-85 put spread for $1.35
  • Result: Net credit of $3.05.
    • Max gain = $3.05
    • Max risk = $1.95
  • Expiration: Value depends on stock trading within the range 85 to 90.

Q&A Highlights

  • Exit Strategies: Vary by investor's risk tolerance; consider closing positions when a certain profit is achieved.
  • Using Delta for Strike Selection: Delta can indicate the probability of options ending in the money; assists in risk management decisions.
  • Legging into/out of Spreads: Can be done, but alters risk profile; the market often provides combined pricing for executing strategies.
  • Assignment Risk: Remove by closing positions before expiration.

Conclusion

  • Next Webinar: Continuation on Iron Condors and Butterflies, exploring more dynamic spreads and risks.
  • Contact: Email the OIC Investor Education Desk for more information: [email protected].

Full transcript