The Winged Beasts
The Butterfly and Condor Clans
We have previously introduced the large and diverse option family of the range bound structures and visited in some detail two of the less frequently discussed trades, the double calendar and the double diagonal. Since attracting attention to the lesser known brethren of the family, the branch representing the winged beasts, the divas of the group, has made its impatience for the spotlight to be known and is demanding its usual disproportionate quota of attention. So it shall be.
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This more visible portion of the clan retains the characteristic defining points of family identity: a variably large range of profitability with regard to price of the underlying and the theta positive blood type. In addition, this branch has additional characteristics of being vega negative and having the individual option positions selected from a single expiration date. To review, lest they feel slighted by not being introduced once again, the specific names of the individual family members of this branch are: butterfly, iron butterfly, condor and iron condor.
Butterfly, Iron Butterfly, Condor and Iron Condor
The nomenclature of the family is more complicated than necessary; the positions are more similar in both anatomy and physiology than the individual family members would like to admit. I will not discuss the potentially embarrassing genetics in the interest of family privacy. The fundamental defining anatomy of this group is to be found in the butterfly structure. It is from this basic structure that the individual members of the Winged Beasts group of option strategies have evolved.
Butterflies and Iron Butterflies
Butterflies in their classic form, whether in puts or calls, are constructed with the anatomy of 1/-2/1. The concise description is to "sell the body and buy the wings". This structure finds its evolution from the combination of a bull and bear vertical spread. It is in the butterfly that this branch of the family generally finds both its most profitable trades based on percentage returns and its narrowest zones of profitability.
The butterfly can be constructed in puts, calls, or both puts and calls. When constructed in both puts in calls, the appellation "iron butterfly" is used. This general organizational structure applies throughout this branch of the family; structures composed of both puts and calls are termed iron. Put and call butterflies are debit transactions while the iron butterfly is a credit trade.
The remaining members of this branch of the family can be most easily viewed from an organizational standpoint as butterflies with cosmetic surgery of varying degrees. The first step in the gradual transmogrification is to separate the two short strikes of a classic butterfly from the 1/-2/1 anatomy to the 1/-1/-1/1 skeletal framework. This surgery produces the entity of a split-strike butterfly. It should be noted that as is often the case of creatures created from surgical rearrangement, we are entering the arena of disparate nomenclature. Some would consider this newly modified entity to be a condor, the result of the next to be described modification in our collection of winged beasts.
The Split-Strike Butterfly
As compared with a butterfly structure, the split-strike butterfly has the primary physiologic effect of broadening the price range of the underlying over which the position is profitable. As in life in general, increases in yin are irrevocably linked to decreases in yang. Benefits accruing to the trade from this anatomic modification and widening of the zone of profitability are accompanied by reduction in the maximum potential extent of profitability.
Condors and Iron Condors
The final step in our surgical manipulation (some rabid butterfly traders would use the word mutilation, but that is in the eye of the beholder) of the butterfly is the condor and its most frequently encountered variation, the iron condor. In the shorthand in which we have described the skeletal anatomy, the condor could be written as 1/-1/-/-/-/-/-1/1. The iron condor could be designated as 1/-1/-/- (put segment) and -/-/-1/1 (call segment).
Condors vs. Iron Condors
The condor is a debit transaction and the iron condor is a credit trade. This final step in the surgical modification has the major effect of broadening yet again the profitable range of prices over which the underlying can oscillate and remain profitable. The broadening of the profitability range is once again accompanied by reduction in the maximum achievable percentage profit.
Each of the condor family members has certain important physiologic characteristics arising from the specific anatomical components and the manner in which they are combined within the complete position. The trader must be aware of these specific points of distinction. The fine structural detail possible within the broad framework of the skeletal anatomy can give a host of specific trades and can result in either directionally biased or directionally agnostic structures.
There will be more discussion to follow on the specifics. Each of these structures, its anatomy, physiology, and peculiarities is the subject for extensive and detailed discussion.
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