An important message for our US visitors: Binary options trading in the US is only permitted on exchanges regulated by the CFTC. US regulators have warned about the risks of using offshore platforms, which are not authorized. Crypto.com is a top-rated, CFTC-regulated platform with binary and event contracts.

Butterflies & Condors

This article was originally contributed by the archived community member jxr. We no longer maintain contact details for the original author. The content has been fact-checked and updated for accuracy by our editorial team.

In the last couple posts I talked about vertical spreads in the SPY. A Butterfly or a Condor is a combination of bullish and bearish vertical spreads. There are many variations –

An out of the money bullish position composed of all calls is a “call fly”

An out of the money bearish position composed of all puts is a “put fly”

An at the money neutral position composed of calls & puts is an “iron butterfly”

A butterfly with different but close together short strikes is a “split strike butterfly”

Any of the above with a large distance between short strikes is a “condor” – call condor, put condor & iron condor.

Any of the above with more verticals on one side than the other is the “ratio” version. For example a put fly with 3 long verticals and 2 short verticals is a “ratio put fly”.

Any of the above with one side composed of wider verticals is the “broken wing” version. For example a call condor with a 1 strike wide bullish spread and a 2 strike wide bearish spread is a “broken wing call condor”.

I don’t like any at the money neutral spreads, they take longer to make money & it’s hard to predict that a market will stay range-bound long enough to profit. So all of the “wing spreads” that I trade are out of the money. If you expect a market will move a significant but not great distance & then consolidate for at least several days then a winged spread can work well. The farther you can go out of the money the better they behave, provided that your price assumption is correct.

On the surface a wing spread is a short Vega position. Meaning that if the demand for options increases the position will suffer so that it would seem to be a bad fit for a bearish index market assumption – but in truth an out of the money wing spread will do well regardless of implied volatility as long as it’s a decent distance out of the money initially and the short strikes aren’t too far apart.

In my next post I’ll illustrated these ideas with a few examples.