Iron Condors & Iron Butterflies

Four-leg strategies that combine credit spreads to create defined-risk, defined-reward positions. These are popular income strategies for neutral to range-bound markets.

Iron Condor

Description

An iron condor combines a bull put spread and a bear call spread, creating a wide profit zone. This is one of the most popular credit strategies.

Composition: - Long 1 put at strike A (protection) - Short 1 put at strike B (income) - Short 1 call at strike C (income) - Long 1 call at strike D (protection)

Where: A < B < C < D

Market Outlook

• Neutral - Expect the underlying to stay between the short strikes
• Profits if price stays in the range at expiration
• Ideal for low-volatility, range-bound markets

Profit/Loss

• Maximum Profit: Net credit received
• Maximum Loss: Width of spread - net credit
• Breakeven: Short put strike - net credit, Short call strike + net credit

Example

import optopsy as op

data = op.csv_data('SPX_options.csv')

# Backtest iron condors
results = op.iron_condor(
    data,
    max_entry_dte=45,
    exit_dte=21,
    leg2_delta={"target": 0.20, "min": 0.15, "max": 0.25},  # Short put delta
    leg3_delta={"target": 0.20, "min": 0.15, "max": 0.25},  # Short call delta
    min_bid_ask=0.10
)

print(results)

Use Cases

• Income generation in range-bound markets
• After high IV events (post-earnings IV crush)
• When you expect low volatility
• Monthly income strategies (45 DTE entry, 21 DTE exit)

Management Guidelines

• Take Profit: Close at 50% of max profit
• Stop Loss: Close at 200% of credit received or 21 DTE
• Rolling: Roll untested side if challenged
• Profit Zone: Typically 60-70% probability of profit

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Reverse Iron Condor

Description

The opposite of an iron condor - this strategy profits from large price movements in either direction while defining risk.

Composition: - Short 1 put at strike A - Long 1 put at strike B - Long 1 call at strike C - Short 1 call at strike D

Where: A < B < C < D

Market Outlook

• High Volatility Expected - Anticipate breakout in either direction
• Profits if price moves significantly beyond inner strikes
• Defined-risk alternative to long straddles

Profit/Loss

• Maximum Profit: Width of spread - net debit
• Maximum Loss: Net debit paid
• Breakeven: Long put strike + debit, Long call strike - debit

Example

results = op.reverse_iron_condor(
    data,
    max_entry_dte=30,
    exit_dte=0,
    leg2_delta={"target": 0.25, "min": 0.20, "max": 0.30},  # Setup for breakout moves
)

Use Cases

• Before major events expecting big moves
• Defined-risk volatility plays
• When you expect a breakout but want limited loss

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Iron Butterfly

Description

An iron butterfly is similar to an iron condor but with the short strikes at the same price (ATM), creating a tighter profit zone with higher potential profit.

Composition: - Long 1 put at strike A (wing) - Short 1 put at strike B (body) - Short 1 call at strike B (body) - same as short put - Long 1 call at strike C (wing)

Where: A < B < C

Market Outlook

• Very Neutral - Expect price to stay at or very near current level
• Maximum profit if price is exactly at middle strike at expiration
• Higher reward but narrower profit zone than iron condor

Profit/Loss

• Maximum Profit: Net credit received (larger than iron condor)
• Maximum Loss: Width of wing - net credit
• Breakeven: Short strike ± net credit

Example

results = op.iron_butterfly(
    data,
    max_entry_dte=45,
    exit_dte=21,
    leg2_delta={"target": 0.50, "min": 0.45, "max": 0.55},  # ATM body for maximum credit
    min_bid_ask=0.15
)

Use Cases

• Expecting price to pin at a specific level
• Around major strikes with high open interest
• When you want higher credit than iron condors
• Lower probability but higher reward than iron condors

Pin Risk

• Stock prices tend to pin at strikes with high open interest
• Iron butterflies benefit from this pinning effect
• Monitor expiration week price action carefully

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Reverse Iron Butterfly

Description

The opposite of an iron butterfly - profits from large moves away from the center strike.

Composition: - Short 1 put at strike A (wing) - Long 1 put at strike B (body) - Long 1 call at strike B (body) - same as long put - Short 1 call at strike C (wing)

Where: A < B < C

Market Outlook

• High Volatility - Expect significant move from current price
• Defined-risk alternative to long straddles
• Lower cost and defined max loss

Profit/Loss

• Maximum Profit: Width of wing - net debit
• Maximum Loss: Net debit paid
• Breakeven: Long strike ± net debit

Example

results = op.reverse_iron_butterfly(
    data,
    max_entry_dte=30,
    exit_dte=7,
    leg2_delta={"target": 0.40, "min": 0.30, "max": 0.50},
)

Use Cases

• Before major events (earnings, FDA decisions)
• When you expect explosive moves
• Defined-risk alternative to long straddles/strangles

---

Strategy Comparison

Strategy	Profit Zone	Max Profit	Max Loss	Best For
Iron Condor	Wide range	Medium credit	Defined	Range-bound income
Reverse IC	Outside range	Defined	Net debit	Breakout plays
Iron Butterfly	Narrow (at ATM)	Higher credit	Defined	Pinning at strike
Reverse Iron Butterfly	Away from ATM	Defined	Net debit	Volatility explosion

Iron Condor vs Iron Butterfly

Iron Condor: - ✅ Wider profit zone (60-70% probability) - ✅ More forgiving if price moves - ❌ Lower credit received - Use when: Moderate confidence in range

Iron Butterfly: - ✅ Higher credit (2-3x more) - ❌ Narrower profit zone (40-50% probability) - ❌ Less forgiving to price movement - Use when: High confidence in pinning

Advanced Example: Delta-Neutral Iron Condors

# Target delta-neutral positioning
results = op.iron_condor(
    data,
    max_entry_dte=45,
    exit_dte=21,
    # Target specific delta for short strikes
    leg2_delta={"target": 0.16, "min": 0.15, "max": 0.20},
    leg3_delta={"target": 0.16, "min": 0.15, "max": 0.20},
    delta_interval=0.05,
    min_bid_ask=0.10,
    slippage='liquidity'
)

Risk Management Best Practices

Entry Checklist

• [ ] 45 DTE or less (optimal theta decay)
• [ ] Credit > 1/3 width of spreads
• [ ] Probability of profit > 60%
• [ ] Liquid strikes (tight bid-ask spreads)
• [ ] Defined position size (< 5% of account per trade)

Management Rules

1. Take Profit: Close at 50% max profit (21 DTE)
2. Stop Loss: Close at 200-300% of credit or break-even
3. Rolling: Roll down/up untested side if challenged early
4. Expiration: Avoid holding through expiration (pin risk)

Position Sizing

• Risk no more than 2-5% per trade
• Iron condors: Width determines risk per contract
• Example: $5 wide spreads for $2 credit = $300 max risk per IC

Greeks Analysis

Iron Condor Greeks

• Theta: Positive (time decay helps you)
• Vega: Negative (want volatility to decrease)
• Delta: Near zero (neutral position)
• Gamma: Negative (position against you if price moves)

Optimal Conditions: - High IV → Sell when IV is elevated - Decreasing volatility → IV crush benefits position - Time passes → Theta decay increases profit

Common Mistakes to Avoid

1. Holding Too Long: Exit at 50% profit, don't be greedy
2. Wrong IV Environment: Don't sell when IV is low
3. Too Narrow: Ensure adequate buffer between short strikes
4. Ignoring Adjustments: Have a plan if price threatens strikes
5. Over-Sizing: Respect max loss per position

Next Steps

• Learn about Butterfly Spreads for three-leg alternatives
• Explore Calendar Spreads for time-based strategies
• See more Examples with risk management
• Review Parameters for optimization