Butterfly and Condor Option Spreads

Like other types of options spreads, butterflies and condors are used to profit from either a directionless market or one that is expected to move sharply upward or downward, but without knowing which direction, such as after an earnings report. One advantage of butterflies and condors over straddles or strangles is that profits can be made from a nondirectional market with limited risk. Butterfly and condor option spreads consists of 4 options spread across several strike prices. Each leg of the spread consists of an equal number of contracts. The best reward/risk profile is usually obtained by selecting the center strike prices that are closest to the market price of the underlying security.

Butterflies

A butterfly spread consists of either all calls or all puts at 3 consecutive strike prices. The 2 intermediate options share the same strike price, and have a position, either short or long, that is opposite of the outer strikes. The butterfly (aka fly) spread takes its name from the shape of the graph, where the 2 inner options are considered the body of the butterfly while the outer options are considered its wings. A butterfly can also be viewed as 2 adjacent vertical spreads where the intermediate options share the same strike price. Likewise, a butterfly can also be viewed as a short straddle bounded by a long strangle, or vice versa.

The long butterfly profits from either a bear or a bull market while the short butterfly profits from a directionless market, one that meanders sideways.

The use of calls and puts in a butterfly has the same profit/risk profile. Therefore, the selection of which type of spread to use will depend on the current market prices of the options. Once the strategy and strike prices are determined, then the trader should choose the options requiring the smallest payment for a long position since the debit will be the maximum possible loss, or one that yields the greatest credit for the short position, since the credit is the short trader's maximum profit.

Whether the butterfly is a long or short position is reflected in the position of the outer options: if the trader is long in the outer options and short on the inner options, then it is a long butterfly; otherwise, it is a short butterfly. Generally, a short butterfly is undertaken when the underlying security has clear support and resistance levels, which strongly indicates that the underlying security will be range bound.

Long Butterfly

A long butterfly is established, as they say, by buying the wings and selling the body. With a long call butterfly, the long lower call is generally in the money, which is offset by the cost of the 2 middle calls, which are sold. To limit upside risk from the 2 short options, another long call is bought at a higher strike. With a long put butterfly, the highest strike put is generally in the money, while the lowest strike put is bought to offset the risk of the inner short puts.

A bullish or bearish strategy can be obtained by selecting strike prices that are more bullish or bearish respectively. The maximum profit is earned when the stock price = the inner strike price at expiration. If the stock price is lower than the inner strikes, then the long lower call will either earn less or nothing; if the stock price is higher, then the short inner calls will lower the profit earned by the long call until the price equals the highest strike. Thereafter, the 2 short calls offset the 2 long calls. (Note: for the following discussion, K₁, K₂, K₃, and K₄ denote successive strike prices, from lowest to highest.)

Maximum Profit: K₂ − K₁ − Debit
Maximum Loss: Debit
Breakeven Points: K₁ + Debit; K₃ − Debit

Long Call Butterfly Profit/Loss
Stock Price	Profit/Loss
S < K₁	Debit	Maximum loss: all options expire worthless.
K₁ < S < K₂	S − K₁ − Debit	The value of the spread increases by $1 for each $1 increase in the underlying.
S = K₂	K₂ − K₁ − Debit	Maximum profit.
K₂ < S < K₃	S − K₁ − 2 × (S − K₂) − Debit	For each $1 increase in the underlying, the long option increases the value of the spread by $1 while the short options decrease the value by $2, so the net value of the spread decreases by $1 for each $1 increase in the underlying.
S ≥ K₃	Debit	Maximum loss: short options offset long options.
S = Stock Price K₁ = Lower Call Strike (Long) K₂ = Inner Call Strikes (Short) K₃ = Upper Call Strike (Long)

Example: Long Call Butterfly for Microsoft Established on July 15, 2014
Long Call Butterfly
Stock Price	$42.45
September, 2014 Calls	Strike	Price
1 Long K₁	40	-$2.76
2 Short K₂	42	$1.42
1 Long K₃	44	-0.63

Total Debit	− $0.55
Maximum Loss	− $0.55
Maximum Profit	$1.45
Line chart showing the potential profit/loss of a long call butterfly option spread for Microsoft at options expiration for underlying stock prices of $39 to $45. Because 1 option contract covers 100 shares, each spread can earn a maximum of $145 minus the transaction costs for the 4 contracts composing each spread; the maximum loss is − ($55 + transaction costs).

Short Butterfly

The short butterfly profits when the underlying stock price is expected to be either lower than the bottom strike or higher than the top strike and is established by selling the 2 outer options and buying the 2 inner options. The maximum profit = the credit received for establishing the short butterfly.

Short Call Butterfly Profit/Loss
Stock Price	Profit/Loss
S < K₁	Credit	Maximum profit: all options expire worthless.
K₁ < S < K₂	Credit − (S − K₁)	The value of the spread decreases by $1 for each $1 increase in the underlying.
S = K₂	Credit − (K₂ − K₁)	Maximum loss.
K₂ < S < K₃	Credit − (S − K₁) + 2 × (S − K₂)	For each $1 increase in the underlying, the short option decreases the value of the spread by $1 while the 2 long options increase the value by $2, so the net value of the spread increases by $1 for each $1 increase in the underlying.
S ≥ K₃	Credit	Maximum profit: short options offset long options.
S = Stock Price K₁ = Lower Call Strike (Short) K₂ = Inner Call Strikes (Long) K₃ = Upper Call Strike (Short)

Example: Long and Short Call Butterflies for Facebook Established on July 31, 2014
Long Call Butterfly
Stock Price	$73.06
October, 2014 Calls	Strike	Price
1 Long K₁	70	-$6.15
2 Short K₂	72.5	$9.70
1 Long K₃	75	-$3.70

Debit	$0.15
Maximum Loss	$0.15
Maximum Profit	$2.35
Line chart showing the potential profit/loss of a long call butterfly option spread for Facebook at options expiration for underlying stock prices ranging from $69.50 to $75.50.
Short Call Butterfly
October, 2014 Calls	Strike	Price
1 Short K₁	70	$6.15
2 Long K₂	72.5	-$9.70
1 Short K₃	75	$3.70

Credit	$0.15
Maximum Profit	$0.15	= Credit
Maximum Loss	$2.35
Lower Breakeven Stock Price	$70.15	= K₁ + Credit
Upper Breakeven Stock Price	$74.85	= K₃ − Credit
Line chart showing the potential profit/loss of a short call butterfly option spread for Facebook at options expiration for underlying stock prices ranging from $69.50 to $75.50.
To take advantage of a large expected price change in the underlying; it may be better to use either a long straddle or a long strangle, where profits are unlimited but losses are limited to the cost of the options. For both the butterfly and the condor when using the same strike prices for both long and short position, the maximum profit of the long position equals the maximum loss of the short position, and vice versa.

A butterfly can also be constructed with puts:

Example: Long Put Butterfly for Facebook Established on July 31, 2014
Long Put Butterfly
Stock Price	$73.06
October, 2014 Puts	Strike	Price
1 Long K₁	70	-$3.10
2 Short K₂	72.5	$8.30
1 Long K₃	75	-$5.60

Debit	$0.40
Maximum Loss	$0.40
Maximum Profit	$2.10
Line chart showing the potential profit/loss of a long put butterfly option spread for Facebook at options expiration for underlying stock prices ranging from $69.50 to $76.

Condors

The condor option strategy is so-called because it is considered to have wider wings that results from using options with 4 consecutive strikes instead of the 3 used in a butterfly. The condor has wider breakeven points and can remain profitable over a longer range of the underlying stock price. However, the maximum profit will be less than for an equivalent butterfly.

A long condor is a nondirectional market strategy consisting of all calls or all puts, where the 2 inner options are at consecutive strike prices and the lower outer long option is bought at the strike price below the 2 inner that are sold and another long option at the next strike price above those that are sold. If some strike prices are skipped between the inner short options and the outer long options, then this strategy is called a pterodactyl, for its wider wingspan. A long condor can also be thought of as being 2 verticals, a combination of a bull vertical and a bear vertical.

Long Condors

The maximum profit in a long condor is achieved as long as the price of the underlying stays within the 2 short center strikes. The maximum risk is the debit paid to establish the condor.

Maximum Profit = K₂ − K₁ − Debit
Maximum Risk = Debit
Lower Breakeven Point = K₁ + Debit
Upper Breakeven Point = K₄ − Debit

Profit is earned when the underlying security closes between the wings at a price from which the difference from either strike exceeds the cost of the spread.

Long Call Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Debit	Maximum loss: all calls expire worthless.
K₁ < S < K₂	S − K₁ − Debit	The value of the spread increases by $1 for each $1 increase in the underlying.
K₂ ≤ S ≤ K₃	K₂ − K₁ − Debit	Maximum profit. Each $1 increase in the underlying increases the value of the long call by $1, but is offset by the $1 liability of the short call, so the profit remains level in this range.
K₃ < S < K₄	S − K₁ − (S − K₂) − (S − K₃) − Debit	Because both short calls are in the money in this range, the value of the spread decreases by $1 for each $1 increase in the underlying.
S ≥ K₄	Debit	Maximum loss: short calls offset long calls.
S = Stock Price K₁ = Lowest Call Strike (Long) K₂ = Next Call Strikes (Short) K₃ = Next Call Strike (Short) K₄ = Highest Call Strike (Long)

Long Call Condor for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	-$6.15	Buy 70 Call
K.2	72.5	$4.85	Sell 72.5 Call
K.3	75.0	$3.70	Sell 75 Call
K.4	77.5	-$2.73	Buy 77.5 Call
Debit		−$0.33

Maximum Profit	$2.17
Maximum Loss	$0.33
A line chart showing the value of a long call condor for Facebook as the stock price varies from $68 to $80.

Long Put Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Debit	Maximum loss: short puts offset long puts.
K₁ < S < K₂	K₄ − S − (K₃ − S) − (K₂ − S) − Debit	Because both short puts are in the money in this range, the value of the spread decreases by $1 for each $1 decrease in the underlying.
K₂ ≤ S ≤ K₃	K₄ − K₃ − Debit	Maximum profit. Each $1 decrease in the underlying increases the value of the long put by $1, but is offset by the $1 liability of the short put, so the profit remains level in this range.
K₃ < S < K₄	K₄ − S − Debit	The value of the spread increases by $1 because of the long put for each $1 decrease in the underlying.
S ≥ K₄	Debit	Maximum loss: all puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Long) K₂ = Next Put Strike (Short) K₃ = Next Put Strike (Short) K₄ = Highest Put Strike (Long)

Long Put Condor for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	-$3.10	Buy
K.2	72.5	$4.15	Sell
K.3	75.0	$5.50	Sell
K.4	77.5	-$8.95	Buy
Debit		−$2.40

Maximum Profit	$0.10
Maximum Loss	$2.40
A line chart showing the value of a long put condor for Facebook as the stock price varies from $68 to $80, using the same strike prices as the long call condor. Obviously, the long call condor is preferable for these strike prices.

Short Condors

A short condor, like the short butterfly, is used when the underlying price is expected to move sharply upward or downward. The maximum risk occurs when the market meanders, without direction.

Short Call Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Credit	Maximum profit: all calls expire worthless.
K₁ < S < K₂	Credit − (S − K₁)	The value of the spread decreases by $1 for each $1 increase in the underlying.
K₂ ≤ S ≤ K₃	Credit − (K₂ − K₁)	Maximum loss. Each $1 increase in the underlying increases the value of the long call by $1, but is offset by the $1 liability of the short call, so the profit remains level in this range.
K₃ < S < K₄	Credit − (S − K₁) + (S − K₂) + (S − K₃)	Because both long calls are in the money in this range, the long call that is not offset by the short call increases the value of the spread by $1 for each $1 increase in the underlying.
S ≥ K₄	Credit	Maximum profit: short calls offset long calls, leaving only the credit.
S = Stock Price K₁ = Lowest Call Strike (Short) K₂ = Next Call Strikes (Long) K₃ = Next Call Strike (Long) K₄ = Highest Call Strike (Short)

Short Put Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Credit	Maximum profit: short puts offset long puts.
K₁ < S < K₂	Credit − (K₄ − S) + (K₃ − S) + (K₂ − S)	Because both long puts are in the money in this range, the 1 put not offset by the short put increases the value of the spread by $1 for each $1 decrease in the underlying.
K₂ ≤ S ≤ K₃	Credit − (K₄ − S) + (K₃ − S)	Maximum loss. Each $1 decrease in the underlying increases the value of the long put by $1, but is offset by the $1 liability of the short put, so the profit remains level in this range.
K₃ < S < K₄	Credit − (K₄ − S)	The value of the spread decreases by $1 because of the short put for each $1 decrease in the underlying.
S ≥ K₄	Credit	Maximum profit: all puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Short) K₂ = Next Put Strike (Long) K₃ = Next Put Strike (Long) K₄ = Highest Put Strike (Short)

Short Put Condor for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	$3.10	Sell
K.2	72.5	-$4.15	Buy
K.3	75.0	-$5.50	Buy
K.4	77.5	$8.95	Sell
Credit		$2.40

Maximum Profit	$2.40
Maximum Loss	$0.10
A line chart showing the value of a short put condor for Facebook as the stock price varies from $68 to $80, using the same strike prices as the long call condor. Given the market conditions at the time of the spread, this is the best spread to use if the price of Facebook is expected to move at least $3 upward or downward within the 2½ months till expiration, which is very likely. Although the profit is limited to $2.40, the maximum loss of $.10 is much less than an equivalent long straddle or strangle. Since American option contracts cover 100 shares on the underlying, each spread would earn $240 compared to a possible $10 loss, which is a pretty decent trade-off.

Iron Spreads

An iron butterfly or condor spread uses both puts and calls. The inner options consists of a put and a call, which are either long or short, and the outer options are both a put and a call, either short or long. Technically, a long spread is paid for with a debit, while a short spread yields a credit. In a plain-vanilla long butterfly, the inner options are sold while the outer options are bought, which usually results in a debit because one of the long options is in the money, which increases the cost of the spread. However, in an iron spread, the inner options are usually at the money while the outer options will be out of the money because one is a OTM call and the other is a OTM put. Therefore, a long iron spread — either butterfly or condor — will yield a credit while the short spread will cost a debit. This is opposite to the plain-vanilla spreads.

Most condors have a call spread and put spread of equal width. An iron condor consisting of a call spread with a different width from the put spread is called a broken wing iron condor.

For the short iron condor, a larger premium will be collected if the call and put spreads are closer to one another, but will also have a higher probability of losses, since the breakeven points will be closer.

Long Iron Butterfly and Condor

The long iron butterfly and the long iron condor are established by selling a straddle and buying a strangle that brackets the straddle, using both puts and calls. The strike prices of the 2 inner options are the same for the butterfly, but different for the condor; otherwise, they have a similar reward/risk profile. So a long iron butterfly would have long options for the wings and short options for the body, such as a long put at strike K₁, a short put at K₂, a short call at K₂, and a long call at K₃.

The long iron butterfly or condor can also be viewed as a combination of 2 vertical spreads: a bull put credit spread and a bear call credit spread.

Long Iron Butterfly or Condor as a Combination of a Bull and a Bear Credit Vertical Spread
Bull Put Credit Spread	+	Bear Call Credit Spread
	+

Maximum Profit: Credit
Maximum Loss: (K₃ − K₂) or (K₂ − K₁) − Credit
Underlying Price Breakeven Points: K₃ + Credit; K₂ − Credit

Long Iron Butterfly Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Credit − (K₂ − K₁)	Maximum loss at K₁: at lower prices, the short put offsets the long put; calls expire worthless.
K₁ < S < K₂	Credit− (K₂ − S)	The short put decreases by $1 for each $1 increase in the underlying, thereby increasing the value of the spread by $1.
S = K₂	Credit	Maximum profit. All options expire worthless.
K₃ < S < K₄	Credit − (S − K₂)	The short call decreases the value of the spread by $1 for each $1 increase in the underlying.
S ≥ K₄	Credit − (K₄ − K₃)	Maximum loss at K₄: at higher prices, the short call offsets the long call; puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Long) K₂ = Put Strike (Short) K₃ = Call Strike (Short) Remember that in the butterfly, the strike prices of the inner put and call are equal; in a condor, they are different. K₄ = Highest Call Strike (Long)

Example: Long Iron Butterfly for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	-$3.10	Buy 70 Put
K.2	72.5	$4.15	Sell 72.5 Put
K.3	72.5	$4.75	Sell 72.5 Call
K.4	75.0	-$3.70	Buy 75 Call
Credit		$2.10

Maximum Profit	$2.10
Maximum Loss	$0.40
Line chart showing the value of a long iron butterfly for Facebook as the stock price varies from $69 to $76.

Long Iron Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	Credit − (K₂ − K₁)	Maximum loss at K₁: at lower prices, the short put offsets the long put; calls expire worthless.
K₁ < S < K₂	Credit − (K₂ − S)	The short put decreases by $1 for each $1 increase in the underlying, thereby increasing the value of the spread by $1.
K₂ ≤ S ≤ K₃	Credit	Maximum profit. All options expire worthless.
K₃ < S < K₄	Credit − (S − K₃)	The short call decreases the value of the spread by $1 for each $1 increase in the underlying.
S ≥ K₄	Credit − (K₄ − K₃)	Maximum loss at K₄: at higher prices, the short call offsets the long call; puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Long) K₂ = Put Strike (Short) K₃ = Call Strike (Short) K₄ = Highest Call Strike (Long)

Example: Long Iron Condor for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	-$3.10	Buy 70 Put
K.2	72.5	$4.15	Sell 72.5 Put
K.3	75.0	$3.65	Sell 72.5 Call
K.4	77.5	-$2.73	Buy 75 Call
Credit		$1.97

Maximum Profit	$1.97
Maximum Loss	$0.53
Line chart showing the value of a long iron condor for Facebook as the stock price varies from $68 to $80. As you can see, the long iron condor has a slightly lower maximum profit ($1.97 versus $2.10) and a slightly higher maximum loss ($.53 versus $.40) than the long iron butterfly using the same strike prices. However, the long iron condor is more likely to be profitable because the maximum profit is earned between 2 consecutive strike prices rather than at a single strike price.

Short Iron Butterfly and Condor

Short Iron Butterfly or Condor as a Combination of a Bull and a Bear Debit Vertical Spread
Bear Put Debit Spread	+	Bull Call Debit Spread
	+

Short Iron Butterfly Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	(K₂ − K₁) − Debit	Maximum loss at K₁: at lower prices, the short put offsets the long put; calls expire worthless.
K₁ < S < K₂	(K₂ − S) − Debit	The long put increases the value of the spread by $1 for each $1 decrease in the underlying.
S = K₂	Debit	Maximum loss. All options expire worthless, leaving only the debit.
K₃ < S < K₄	(S − K₃) − Debit	The long call increases the value of the spread by $1 for each $1 increase in the underlying.
S ≥ K₄	(K₄ − K₃) − Debit	Maximum loss at K₃: at higher prices, the short call offsets the long call; puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Short) K₂ = Put Strike (Long) K₃ = Call Strike (Long) K₄ = Highest Call Strike (Short)

Maximum Profit: (K₂ − K₁) − Debit
Maximum Loss: Debit
Breakeven Points: K₂ − Debit; K₂ + Debit

Short Iron Condor Profit/Loss
Stock Price	Profit/Loss
S ≤ K₁	(K₂ − K₁) − Debit	Maximum profit at K₁: at lower prices, the short put offsets the long put; calls expire worthless.
K₁ < S < K₂	(K₂ − S) − Debit	The short put decreases the value of the spread by $1 for each $1 decrease in the underlying.
K₂ ≤ S ≤ K₃	Debit	Maximum loss. All options expire worthless, leaving only the debit.
K₃ < S < K₄	(S − K₃) − Debit	The short call decreases the value of the spread by $1 for each $1 increase in the underlying.
S ≥ K₄	(K₄ − K₃) − Debit	Maximum loss at K₃: at higher prices, the short call offsets the long call; puts expire worthless.
S = Stock Price K₁ = Lowest Put Strike (Short) K₂ = Put Strike (Long) K₃ = Call Strike (Long) K₄ = Highest Call Strike (Short)

Example: Short Iron Condor for Facebook
October Options	Strike	Cost
Stock Price	$73.06
Date	7/31/2014
K.1	70.0	$3.10	Sell Put
K.2	72.5	-$4.15	Buy Put
K.3	75.0	-$3.65	Buy Call
K.4	77.5	$2.73	Sell Call
Debit		-$1.97

Maximum Profit	$0.53
Maximum Loss	$1.97
Line chart showing the value of a short iron condor for Facebook as the stock price varies from $68 to $80. As you can see, the short iron condor is the inverted image of the long iron condor, with the maximum profit equal to the maximum loss of the other; likewise for the maximum loss.

Choosing Which Spread to Trade

When choosing which spread to trade, the 1^st factor to consider is whether the market is expected to be range bound or whether a large move is expected, but without knowing the direction. If the underlying asset is expected to be range bound, then a long butterfly or condor should be established; otherwise, only short spreads should be considered.

Additionally, commissions should be considered, since they may constitute a larger percentage of potential profits. Some brokers charge a single commission to establish a spread; others will charge each leg of the spread as a separate option transaction, in which case, each condor or butterfly spread would incur 4 transaction costs.

Comparison of the Maximum Profits and Losses for Option Spreads for Facebook

The low for Facebook on the last trading day for October, 2014 options was $73.75 and the high was $76.00, closing at $75.95, so the long spreads were the most profitable.

Long Spread Comparison for a Directionless Market
Spread	Maximum Profit	Maximum Loss
Long Call Butterfly	$2.35	($0.15)
Long Call Condor	$2.17	($0.33)
Long Put Butterfly	$2.10	($0.40)
Long Iron Butterfly	$2.10	($0.40)
Long Iron Condor	$1.97	($0.53)
Long Put Condor	$0.10	($2.40)

Short Spread Comparison for a Bull or Bear Market
Spread	Maximum Profit	Maximum Loss
Short Put Condor	$2.40	($0.10)
Short Iron Condor	$0.53	($1.97)
Short Call Butterfly	$0.15	($2.35)

As with other types of spreads, a butterfly or condor spread for a given set of market conditions should be chosen that yields the greatest return with the least risk, which will depend on the market prices of the constituent options, as can be seen in the 2 tables above, sorted from highest to lowest maximum profit, that summarize the worked out examples for Facebook. Out of the worked out examples, for a directionless market, the long call butterfly offers both the maximum profit with the least risk; for either a bull or bear market, the short put condor offers, by far, the highest profit with the least risk.