I am often asked as an option trading mentor, which is better, the iron condor or the iron butterfly. Both are short Vega trades meaning that they benefit from volatility lowering. However the structure is different and the pros and cons of each are different.
The iron condor, is perhaps the most popular option spread trade. The structure is selling a call vertical and a put vertical, out of the money, usually by several strikes. The benefit to the strategy is that it is short one volatility and also it has a wider range for the price to move around, up or down, before you get into any trouble with the trade. It is a good trade in higher volatility markets because you paid more premium for what you are selling. However, there is no “free lunch” ,and the increased premium comes with the increased risk of large price movements in a volatile market. Think of it as selling car insurance to a 16 year old.The downside of using an iron condor is that when it goes against you, it is more difficult to repair, and you can lose more money because you took in less premium by selling options that were further from the money.
The iron butterfly is also a trade that benefits from lowering volatility. It is structured by selling an at the money call vertical and an at the money put vertical with varying long wing widths. The iron butterfly has more narrow structures than the iron condor however it has a better risk to reward because your return can be so much higher on the money at risk than with the iron condor. This is because you received more premium selling the at the money options. Because it has this greater risk/reward the iron butterfly can be put on in a wider range of markets both lower volatility and higher volatility. Even though it is short volatility it still performs well even in lower volatility markets because of the risk reward. Both of these trades require that the price stay inside of a range for the trade to be profitable.The iron condor gives you more room, and the iron butterfly gives you less room for the price to move. Overall in most markets I preferred the iron butterfly because of the increase risk reward.