Butterfly spreads and iron condors are two of the most popular neutral options strategies. Both profit when the underlying stock stays within a range, but they have different risk profiles, capital requirements, and ideal use cases. In this guide, we will compare these strategies head to head so you can decide which one fits your trading style.
Understanding the Butterfly Spread
A butterfly spread involves three strike prices with options concentrated at the middle strike. You can construct it with all calls, all puts, or a combination (iron butterfly).
Butterfly structure: Buy 1 lower strike, sell 2 middle strikes, buy 1 higher strike. The middle strike is where you want the stock to expire for maximum profit.
Example: Call Butterfly on XYZ at $100
- Buy 1x $95 call for $7.00
- Sell 2x $100 calls for $4.00 each ($8.00 total)
- Buy 1x $105 call for $2.00
- Net debit: $1.00 ($100 per contract)
- Max profit: $4.00 ($400) if stock closes exactly at $100
- Max loss: $1.00 ($100) if stock closes below $95 or above $105
Understanding the Iron Condor
An iron condor combines a put credit spread and a call credit spread on the same underlying with the same expiration. You profit as long as the stock stays between your two short strikes.
Iron condor structure: Sell an OTM put spread + sell an OTM call spread. You collect premium from both sides and win if the stock stays in the middle range.
Example: Iron Condor on XYZ at $100
- Buy 1x $85 put for $0.50
- Sell 1x $90 put for $1.00
- Sell 1x $110 call for $1.00
- Buy 1x $115 call for $0.50
- Net credit: $1.00 ($100 per contract)
- Max profit: $1.00 ($100) if stock stays between $90-$110
- Max loss: $4.00 ($400) if stock goes below $85 or above $115
Key Differences Comparison
Profit Zone
Butterfly: Profits are maximized at a single price point (the middle strike). The profit zone is narrow but the potential return is high.
Iron Condor: Profits are maximized across a wide range between the two short strikes. The profit zone is wider but the potential return is limited to the credit received.
Risk/Reward Profile
Butterfly: Low risk, high potential reward. You pay a small debit for the chance at a large percentage return. Typical risk/reward is 1:4 or better.
Iron Condor: Higher risk relative to reward. You collect a credit but risk losing more than you can make. Typical risk/reward is 1:3 to 1:4 (risking 3-4 to make 1).
Probability of Profit
Butterfly: Lower probability of maximum profit because the stock must close very close to the middle strike. However, partial profits are possible across a range.
Iron Condor: Higher probability of profit because you win anywhere in a wide range. Typical win rates are 60-80% depending on width.
Capital Requirement
Butterfly: Low capital requirement. You only risk the debit paid, which is typically small relative to the potential profit.
Iron Condor: Higher capital requirement. Margin is based on the width of one spread minus the credit received.
Side-by-Side Comparison
| Feature | Butterfly | Iron Condor |
|---|---|---|
| Profit Zone | Narrow | Wide |
| Max Profit Potential | High (300-500%+) | Limited (20-50%) |
| Win Rate | Lower (30-40%) | Higher (60-80%) |
| Capital Required | Low | Higher |
| Best Market | Low volatility, pinning | Range-bound, high IV |
| Legs | 3 strikes, 4 contracts | 4 strikes, 4 contracts |
When to Trade a Butterfly
Butterflies work best in specific situations:
- Pinning expectations: When you expect a stock to pin to a specific price at expiration (like a round number or max pain)
- Low implied volatility: Butterflies are cheaper when IV is low
- Expiration week trades: Butterflies often work well in the final days before expiration
- Earnings pinning: Some traders use butterflies centered on expected post-earnings prices
- Small account size: The low cost makes butterflies accessible for smaller accounts
When to Trade an Iron Condor
Iron condors are ideal for different scenarios:
- High implied volatility: Iron condors collect more premium when IV is elevated
- Range-bound expectations: When you expect the stock to stay within a range but are not sure exactly where
- Income generation: Iron condors are popular for consistent monthly income
- Neutral outlook: When you have no directional bias but believe volatility will decrease
- Longer duration trades: Iron condors work well for 30-45 DTE trades
Pro tip: Many traders use iron condors as their core income strategy and add butterflies as speculative plays when they have high conviction about a specific price target.
Managing Each Strategy
Managing Butterflies
- Consider taking profits at 50% of max gain
- Can roll the position if the stock moves away from your target
- Widen the wings for more room but less profit potential
Managing Iron Condors
- Close early at 50% profit to lock in gains
- Roll the tested side if the stock approaches a short strike
- Close the winning side and manage the losing side separately
Track All Your Complex Strategies
Pro Trader Dashboard automatically recognizes butterflies, iron condors, and other multi-leg strategies. Track your performance by strategy type and see what works best.
Summary
Both butterflies and iron condors are excellent neutral strategies with different strengths. Butterflies offer high reward potential with low risk but require precision in predicting the closing price. Iron condors provide consistent income with higher win rates but limited profit potential and higher capital requirements. Many successful traders use both strategies depending on market conditions and their specific outlook for each trade.
Continue learning with our guides on iron condors vs strangles and iron condor basics.