Are you new to options trading? Do you have a small account and want to start trading iron condors and iron butterflies? Todays podcast is essential as we help you understand how to calculate break-even prices the correct way on iron condors and other risk defined strategies. Plus, well walk through a multi-month adjustment to an existing IWM iron butterfly in which we nearly doubled the credit received by rolling contracts to the next expiration period.

## Iron Condors

• Iron condors are a simple options strategy where you sell a spread on either side of the market.
• If the stock is trading at \$100, you might sell the \$105 call option and buy the \$106 call option. This creates a \$1-wide call spread above the market.
• If the stock is trading at \$100, you might also sell the \$95 strike put option and buy the \$94 strike put option creating a \$1-wide spread below the market.
• The combination of two spreads on either side of the market creates the iron condor payoff diagram.
• Generally, you want to see the stock stay between your two short strike prices.
• If the stock stays between your strike prices and ends between your prices at expiration, then you keep all the credit possible at the expiration.

## What happens if the stock moves just a little bit beyond those strike prices?

• You dont lose automatically.
• This is where break-even prices come into play.

#### Example:

Using the same iron condor example, assume we sold the call spread for 25 cents (the \$105-106 call spread) and sold the put spread for 25 cents. This gives you a total credit of 50 cents. This collective credit now moves your break-even point out 50 cents on either end from your short strikes. That means the true break-even points are now 105.50 on the call side and 94.50 on the put side, which is 50 cents wider than your short strike prices.

*The credit is always based on the addition (call side) and subtraction (put side) of the credit from the strike prices of the short strikes.

• Generally, the markets are pretty fair and efficient when it comes to pricing in these credits and break-evens.
• If you have a wider spread on either end of your Iron Condor, you are generally going to take in a larger net credit, which means your break-even points will be a little wider.
• Therefore, you will potentially have a wider profitability range for the position.
• For you to benefit from that wider range and, potentially, higher win-rate, you will have to take on a little more risk (in the form of the wider spread).

## Iron Butterflies

• The same concept is true for Iron Butterflies as with Iron Condors, except now were dealing with a much larger credit.
• With an Iron Butterfly, you are selling premium at-the-money on both the short call and the short put.

#### Example:

To create an Iron Butterfly strategy, if a stock is trading at \$100, you would sell the \$100 strike put and the \$100 strike call. Then you would buy the same, \$106 strike call and \$94 strike put.

This will generally have a very similar probability of profit. Assume that you took in a net credit for the inside legs of the iron butterfly of \$5.25. That \$5.25 that you take in as a net credit for selling the at-the-money strikes moves your break-even point out \$5.25 on either end (\$100 + \$5.25 = \$105.25 upper break-even point and \$100 - \$5.25 = \$94.75 lower break-even point). You get a very similar payoff diagram as far as break-even points, its just the distribution of your profits are a little bit different.

• With an Iron Butterfly, you are taking in a much higher credit so that if the stock lands closer to where the stock is trading now (meaning it moves sideways), you make a lot more money than with an Iron Condor.

## Reach out

#### Find us at the office

Mcevilly- Liposky street no. 40, 55778 Tórshavn, Faroe Islands

#### Give us a ring

Maliek Elvis
+23 188 845 957
Mon - Fri, 7:00-15:00