GRIP Financial Planning: Growth, Retention, Income, Protection

Options Blueprint

Iron condors & iron butterflies

Four options, one range. How a quiet stock can pay, and how one big move ruins it.

Advanced Range-bound

Important: educational only. Options Blueprint is general financial education, not advice or a recommendation to use any strategy. Options involve significant risk and are not suitable for all investors. Some strategies can lose more than the premium received or paid, and some have unlimited potential losses. Before buying or selling an option, investors must receive and read the OCC’s Characteristics and Risks of Standardized Options. All “Stock XYZ” examples are made up and ignore fees and taxes. Read the full risk disclosure.

Iron condor

Goal Collect premium if the stock stays inside a range. It is a bull put spread plus a bear call spread.

Setup: Sell the XYZ $45 put ($1.00), buy the $40 put ($0.30), sell the $55 call ($1.00) and buy the $60 call ($0.30). Net credit = $0.70 + $0.70 = $1.40 ($140). Results are shown at expiration, per 100-share contract, ignoring fees, dividends and taxes.

Payoff of an XYZ iron condor: $40/$45 put spread and $55/$60 call spread, $1.40 creditA flat-topped mesa: plus $140 between $45 and $55, sloping down through breakevens at $43.60 and $56.40, flat at minus $360 below $40 and above $60.$30$40$50$60$70−$2,000−$1,000$0+$1,000+$2,000XYZ price at expirationProfit / loss per contractHypothetical · ignores feesMax gain +$140$43.60$56.40Max loss −$360Max loss −$360Breakevens $43.60 and $56.40
Iron condor: a flat-topped “mesa.”
Iron condor numbers
At expirationPer sharePer contract (×100)
Max gain$1.40 (XYZ between $45 and $55)+$140
Max loss$5 wing width − $1.40 = $3.60 (XYZ at or below $40, or at or above $60; only one side can lose at expiration)−$360
Breakevens$45 − $1.40 = $43.60 and $55 + $1.40 = $56.40

Iron butterfly

Goal Collect a larger premium by betting the stock ends very close to one price.

Setup: Sell the XYZ $50 put ($2.50) and the $50 call ($2.50), and buy the $45 put ($1.00) and the $55 call ($1.00). Net credit = $5.00 − $2.00 = $3.00 ($300). Results are shown at expiration, per 100-share contract, ignoring fees, dividends and taxes.

Payoff of an XYZ iron butterfly: short $50 put and call, long $45 put and $55 call, $3.00 creditA tent: peaks at plus $300 only if XYZ ends exactly at $50, slopes down through breakevens at $47 and $53, flat at minus $200 below $45 and above $55.$30$40$50$60$70−$2,000−$1,000$0+$1,000+$2,000XYZ price at expirationProfit / loss per contractHypothetical · ignores feesMax gain +$300(only at exactly $50)$47$53Max loss −$200Max loss −$200Breakevens $47 and $53
Iron butterfly: a “tent” that peaks at exactly $50.
Iron butterfly numbers
At expirationPer sharePer contract (×100)
Max gain$3.00 (only if XYZ is exactly $50 at expiration)+$300
Max loss$5 − $3.00 = $2.00 (XYZ at or below $45, or at or above $55)−$200
Breakevens$50 − $3.00 = $47.00 and $50 + $3.00 = $53.00

Key risks

  • Gap and trend risk: one big move can end it.
  • Volatility spikes can push losses higher before expiration.
  • Early assignment on the short legs.
  • Four legs mean four sets of commissions and bid/ask costs.
  • Pin risk at the short strikes.
  • Managing or adjusting these positions takes skill.

What can go wrong: one big move

XYZ is quiet for three weeks, then jumps to $62 on news. The call side of the condor is fully in the money, and at expiration the position is at its maximum loss of −$360 instead of +$140. Maximum profit needs XYZ to stay inside the range all the way to expiration, which is why it is rarely reached.

Who tends to use them

Experienced options users with a range-bound view who understand that maximum profit is rarely reached and plan their exits ahead of time.

Related glossary terms

Related Options Blueprint topic

  • Iron Condors & Iron Butterflies: Betting on a Quiet Stock

We’ll cover these topics in the future. See all Options Blueprint topics.

Important: please read

Educational only. Options Blueprint is general financial education. It is not financial, investment, tax or legal advice, and it is not a recommendation to buy or sell any security or to use any strategy. Nothing here is personalized to you, and viewing it doesn’t create an advisory relationship.

Options are not suitable for everyone. Options are complex and carry significant risk. They can lose money quickly, including the full amount you paid. Some strategies can lose more than the premium received or paid, and some (such as selling uncovered calls) have unlimited potential losses. Assignment can happen at any time before expiration on most stock and ETF options, and prices can gap sharply on news.

Hypothetical examples only. “Stock XYZ” and all prices, premiums and results on this page are made up for illustration. They ignore commissions, fees, bid/ask spreads, dividends, interest, margin requirements and taxes, all of which affect real results. No real tickers are used, and nothing here is a trade recommendation.

Read the official disclosure first. Before buying or selling an option, investors must receive and read the Options Clearing Corporation’s Characteristics and Risks of Standardized Options (the “Options Disclosure Document”), available from your broker or directly from the OCC.

Read the Options Disclosure Document (OCC)

Free investor education from the SEC: Investor Bulletin: An Introduction to Options and Investor Bulletin: Opening an Options Account. To check a professional’s background, see FINRA BrokerCheck.

Talk to a qualified professional before making investment decisions. See our full Disclosures.