What are the differences betwen an iron condor/b'fly and a plain condor/b'fly. Is one difference the use of puts AND calls in the iron version and only puts OR calls in the plain versions?
Well then, I'll have to modify my initial comment since I'm a big fan of praise, provided it's heaped on me. Okay, first response. While the terminology can be confusing, I tend to prefer Natenberg's classifications. Accordingly, a long iron condor and long iron butterfly are equivalent but for the fact that with the former you are selling a strangle and with the latter a straddle. But they are both equivalent to a short bear call spread and a short bull put spread combined. In terms of risk:reward, an iron butterfly obviously has more risk and more reward than the condor. Intuitively, that makes sense since you'd find the same when comparing a short straddle to a short strangle. The Greek profile will be similar between the two positions -- positive theta, negative gamma, negative vega -- with the butterfly having proportionally greater values for each. An interesting variation on both is a double diagonal, whereby you use out months your long hedges. The key difference in that position will be the positive vega, which may make sense under certain circumances. You can also ratio the position, and further add an out month short straddle to get your wrangle. But Baird describes the pros/cons of that monster far better than I can (was that sycophantic?).
Many Thanks HD! Can I heap some praise on you.......??!! In general under what circumstcnes would you use an iron condor, iron butterfly or wrangle. ALso are there any hidden risks with these. For example, what are the risks in constructing an iron condor (short strangle/long strangle) using deep out of the money strikes for the front month. What should you take into account, if you do not intend to hold the position through expiration? Finally, how hard is it in finding liquidity in those strikes Thanks again!
The terminlogy is confusing, as what Natenberg calls a long iron condor or b'fly, Cotttle calls a short iron condor or b'fly! There is no consistency between what is long or short for these positions between varuious authors and traders!
I've never traded a wrangle. So there are others better equipped to discuss them. However, you'd generally choose a wrangle over a straight front month wingspread in order to get some gamma. But it seems to me there are less complicated ways to achieve that. With regard to choosing between a fly or a condor, it boils down to risk tolerance and how confident you are in the range. But clearly, liquidity will be greater with the strikes of a fly than with a condor. Still, unless you really intend to stretch the thing out, creating an albatross, or the options are not very liquid across the entire series, it shouldn't make that much of a difference. But one last general comment. While I like these positions under the right circumstances, they are much less attractive now than they were a year ago when implieds were a lot higher. Thus, you will need to take on a lot more gamma risk now to generate comparable credits.
So if you were confident in the range you would use a condor as opposed to a b'fly. I would assume this, since your profit zone is wider in the condor than in the b'fly as in the b'fly you want the underlying to reach the strike of the straddle you sold?
Correcto, a short iron butterfly = a long butterfly.. as far as both will show the greatest profit at expiration if the underly finishes at the inside straddle exercise
Well, I don't recall Natenberg's definition of a wrangel, but I have traded them couple of times. They are some what better for Low - High - Low volatility periods than many types of butterflies. Cheers,