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Advanced · Lesson 5 of 6Iron condors, butterflies and calendars
An iron condor sells an OTM put spread and an OTM call spread. It profits if the price stays in a range, with defined maximum loss on either side. A butterfly (for example buy 1 low call, sell 2 middle calls, buy 1 high call) profits most if the price finishes at the middle strike, for a small debit.
A calendar (time) spread sells a near-dated option and buys a longer-dated option at the same strike, profiting from faster decay of the near option and from rising implied volatility.
These are professional-grade structures. Bought butterflies and calendars are debit trades with known max loss. Iron condors are credit trades with defined but usually larger risk than reward, and frequent small wins can hide occasional large losses.
Key takeaways
- Iron condor = range bet with defined risk.
- Long butterfly = cheap bet on a precise price.
- Calendars trade time decay and volatility differences.
Check your understanding
1. An iron condor profits most when the share price...
- Moves sharply up
- Stays within a range
- Falls to zero
- Gaps on news
Show the answer
Stays within a range. Both short spreads expire worthless inside the range.
2. A calendar spread typically...
- Buys and sells the same expiry
- Sells a near expiry and buys a later expiry
- Uses futures only
- Has unlimited risk
Show the answer
Sells a near expiry and buys a later expiry. It exploits faster decay of the near-dated option.
Go deeper
- Wikipedia: Iron condor
- YouTube videos: iron condor butterfly calendar spread explained
- Investopedia: iron condor
- Wikipedia: Butterfly (options)
- Wikipedia: Calendar spread
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