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I've never used butterfly spreads before. On occasion, I'll have a long call in my portfolio. More often, I'll write puts on stocks that I'd own and covered calls for lunch money. I also write bull put spreads on trending stocks for pocket change. I'm a dabbler that pretty much understands the mechanics. But not on more complex multileg spreads.

I'd like to confirm max loss on a couple of iron butterfly/ iron condor trades. I've never played with this kind of trade. My understanding is that they are ideal for range bound stocks. I want to make sure that I understand their construction and loss profile properly. AFL is rangebound between 52 and 60 and has been for six months. It trades today at 58. So this a real candidate for a trade. Both are net credit trades, with short NTM legs.

First the iron butterfly:

long Jan21,2021 AFL 60 call
short Jan21 AFL 57.50 call
short Jan21 AFL 57.50 put
long Jan21 AFL 55 put

Q1: The max loss on this position is $250 (minus the net credit on the options) if AFL closes over 60 or under 55 on Jan21. Correct?
Q2: Is this trade assembled correctly?

The ideal would be for AFL to settle at 57.50, with the two short options canceling each other out. But the real goal as I see it, is for AFL to remain rangebound. The timevalue on the more valuable short options (both near the money), erodes and you capture that when you close out the trade. Correct?

Now the iron condor:

long Jan21 AFL 60 call
short Jan21 AFL 58 call
short Jan21 AFL 57 put
long Jan21 AFL 55 put

Q1: The max loss is $200 (minus the net credit) if AFL closes over 60 or under 55. Correct?
Q2: Is this condor assembled correctly?

The ideal would be for AFL to settle between 57 and 58 on Jan21, with the two short options expiring. You keep the net credit on the spread. But it's okay for AFL to remain rangebound. Some of the timevalue on the NTM short options would still be captured by closing the position after it erodes.

Any corrections or insight appreciated....

Peter
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Your numbers look correct to me.

One thing to keep in mind is that AFL is a dividend payer and short call positions could get poached (exercised early) if time value has eroded close to or below the dividend amount. But in this case it appears the ex-dividend date is after the proposed option expiration date so it should be good. Not a big deal either way, just may be a bit of cleanup to do if it is exercised early.

-Daniel
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Daniel,

Thanks for the reply and the warning on early exercise. I do look for earnings release dates in terms of surprise risk, but dividend dates hadn't occurred to me. One more thing to keep an eye on. Very helpful!

Have a good one,

Peter
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I have not tried Iron Butterflies so have no comment about them. I have used Iron Condors quite a few times with SPX and a few times with individual stocks. Not sure they are a great strategy with individual stocks that can move quickly based on unexpected news or earnings reports.

"Now the iron condor:

long Jan21 AFL 60 call
short Jan21 AFL 58 call
short Jan21 AFL 57 put
long Jan21 AFL 55 put

Q1: The max loss is $200 (minus the net credit) if AFL closes over 60 or under 55. Correct?
Q2: Is this condor assembled correctly?"

A1: Yes max loss is $2.00 (minus the net credit at open and minus broker fees + commissions)per share or $200 for 1 contract.

A2: Yes it is assembled correctly.


There is a lot of good option info/examples from optionalpha.com
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I recommend staying away from the Iron Butterly if you're tripping. It's not a good feeling (but not as bad as listening to Helter Skelter from the White Album, that could really push someone over the edge).

https://www.youtube.com/watch?v=ZCkHanF4v1w

Just my opinion, but I think the folks that like these sort of trades the most are the pit traders and those with "a seat at the table" at the big brokerage houses. And those that run subscription services for option trading.

But if its working for you, great, stay with what works.

ETY works fine for me, double-digit annualized returns in the mid-teens since 2013. And a few covered calls once in a while, my last being F bot yesterday (12/27), sold the $20.50s of 12/31/2021...annualized yield as of now 263.23%. Option traders just get to screw me a little bit once...not 4 times.
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