VEGA FIELD GUIDE · 18 · STRATEGIES
Iron Condors and Butterflies: Defined-Risk Range Trades
Condors and butterflies turn a view about where price may finish into a defined-risk payoff. Four legs produce elegant geometry and plenty of small details to check.
Short iron condors and butterflies collect a credit and have defined expiration risk when all legs remain intact.
The short strikes define the preferred expiration region; the long wings cap tail loss.
A high probability of profit can coexist with an unfavorable loss-to-gain ratio.
The body and the wings
A short iron condor combines a bull put credit spread and a bear call credit spread. The short put and short call create a preferred range. The farther long put and long call cap losses beyond the wings.
A short iron butterfly brings the two short strikes together at the body. It collects more premium and concentrates the maximum payoff near one price. Its profitable range is usually narrower. Both positions are short volatility and short gamma around the body.
Credit, width, and breakevens
For an equal-width short iron condor, maximum gain is the net credit. Maximum loss is the wing width minus the credit. The lower breakeven is the short put strike minus the credit, and the upper breakeven is the short call strike plus the credit.
Unequal wings require side-specific loss calculations. The wider side can carry the larger maximum loss. Platform summaries deserve a quick independent check, especially after a leg is adjusted.
(wing width - net credit) x contract multiplierWorked example: a 90/95/105/110 condor
With the stock near $100, buy the 90 put for $0.80, sell the 95 put for $2.00, sell the 105 call for $1.80, and buy the 110 call for $0.70. The net credit is $2.30 per share, or $230.
Both wings are $5 wide. Maximum loss is $2.70 per share, or $270. Breakevens are $92.70 and $107.30. A finish between $95 and $105 keeps the full credit. A finish at $108 produces a $70 loss, while a finish beyond either long wing reaches the $270 maximum loss.
| Stock at expiration | Net P&L | Region |
|---|---|---|
| $88 | -$270 | Lower maximum loss |
| $94 | +$130 | Inside lower breakeven range |
| $100 | +$230 | Maximum gain range |
| $108 | -$70 | Above upper breakeven |
| $112 | -$270 | Upper maximum loss |
Use probability with payoff size
A wide range can produce an appealing model probability of profit. The collected credit may still be small beside the maximum loss. Compare expected value, expected shortfall, return on risk, and the frequency of large gaps. One quiet month can look wonderful; one rude opening print can introduce the wings personally.
Skew affects the credit available on each side. Earnings and other events can distort the range and create asymmetric gap risk. A symmetric strike layout can still produce asymmetric economics.
Four-leg hygiene
- Check quote width and size for all four contracts.
- Enter a realistic net limit and include per-contract fees.
- Stress the underlying beyond both long wings.
- Monitor short-leg assignment and dividend exposure.
- Plan expiration management when spot is near a short strike.
See all four legs together
Build a condor or butterfly, inspect both tails, and compare risk with premium collected.