Advanced options trading strategies

Advanced options strategies: butterflies and condors

Mar 09, 2025

This article is a continuation of a previous options strategies article where we discussed strategies such as debit spreads, credit spreads and volatilty trades.

If you would like to run the code in this article, please check out the previous article to find the function definitions.

You can find the previous article here.

Butterflies (Curvature trades)

A very common options trading strategy is a butterfly trade (called a fly for short). It involves buying a low strike and high strike option (the wings of the fly) and selling an ATM option (the belly of the fly).

A trader would put on this trade if they think that the belly is expensive relative to the wings of the fly, i.e., if the ATM implied volatility is high relative to the low and high strike implied volatility.

The payoff structure of a fly is such that the trader profits if volatility is low and the underlying remains within a range.

This trade can be done with both calls and puts.

The maximum loss for this trade is the premium paid to enter into the fly.

Put Butterfly

Buy a 1 low strike put, sell 2x ATM put, buy 1 high strike put

def long_put_butterfly(s, k1, k2, k3, t, r, sigma):
    return put(s, k1, t, r, sigma) - 2 * put(s, k2, t, r, sigma) + put(s, k3, t, r, sigma)

long_put_butterfly_args = {'s': 100, 
                           'k1': 90, 
                           'k2': 100, 
                           'k3': 110, 
                           't': 1, 
                           'r': 0.05, 
                           'sigma': 0.2}

plot_option_strategy(long_put_butterfly, settlement_values, long_put_butterfly_args)

Call Butterfly

Buy a 1 low strike call, sell 2x ATM call, buy 1 high strike call

def long_call_butterfly(s, k1, k2, k3, t, r, sigma):
    return call(s, k1, t, r, sigma) - 2 * call(s, k2, t, r, sigma) + call(s, k3, t, r, sigma)

long_call_butterfly_args = {'s': 100, 
                            'k1': 90,
                            'k2': 100,
                            'k3': 110, 
                            't': 1, 
                            'r': 0.05, 
                            'sigma': 0.2}

plot_option_strategy(long_call_butterfly, settlement_values, long_call_butterfly_args)

Neutral Income Strategies (Credit)

Traders use iron condors and iron butterflies to generate income through the sale of both call and put options. The traders receive a premium when entering into these trades.

Compared to selling naked calls or puts, iron condors and iron butterflies often have lower margin requirements.

Iron Butterfly

Buy 1 low strike put, sell 1 ATM put. Sell 1 ATM call, buy 1 high strike call.

def iron_butterfly(s, k1, k2, k3, t, r, sigma):
    return put(s, k1, t, r, sigma) - put(s, k2, t, r, sigma) - call(s, k2, t, r, sigma) + call(s, k3, t, r, sigma)

iron_butterfly_args = {'s': 100, 
                       'k1': 90, 
                       'k2': 100, 
                       'k3': 110, 
                       't': 1, 
                       'r': 0.05, 
                       'sigma': 0.2} 

plot_option_strategy(iron_butterfly, settlement_values, iron_butterfly_args)

Iron Condor

Buy 1 very low strike put, sell 1 low strike put. Sell 1 high strike call, buy 1 very high strike call.

def iron_condor(s, k1, k2, k3, k4, t, r, sigma):
    return put(s, k1, t, r, sigma) - put(s, k2, t, r, sigma) - call(s, k3, t, r, sigma) + call(s, k4, t, r, sigma)

iron_condor_args = {'s': 100, 
                    'k1': 80, 
                    'k2': 90, 
                    'k3': 110, 
                    'k4': 120, 
                    't': 1, 
                    'r': 0.05, 
                    'sigma': 0.2}

plot_option_strategy(iron_condor, settlement_values, iron_condor_args)

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