By - bitemenow999
What you have here is a put/call parity substitution, with there being logical equivalency between the credit put vertical and the debit call vertical (using those same strikes).
The traditional credit iron condor, which mixes puts and calls, is arguably easier to manage than having a fully-ITM debit call vertical. It should also generally be more liquid.
In cases of logical equivalence like this, it’s usually liquidity (as seen in the bid/ask spread) which makes one more popular than the other.
Here’s a visual on this parity: https://imgur.com/a/nBmzyM0
The only difference it should make is the early assignment risk for the ITM call you sell. This holds true for Covered Calls vs Naked Puts, where the payoff is near identical for any two options with the same strike and expiry.
There are quant traders with supercomputers that specialize in finding mispriced options and they often have strange spreads like this. These guys are the reason you won't usually find weirdly priced options, as they will be arbitraged away often within seconds.
Google broken heart butterfly (I think that’s what it’s called), tastytrade has some coverage on it.
It’s not a bad idea to set one up like that and I believe the determining factor would be skew and how steep it is in either direction. In general I would say: if expecting an up move toward call skew, use a call fly, and if expecting a down move toward put skew use a put fly.
So you would be using a move like this to anticipate direction, as opposed to a conventional iron condor that expects a stock to stay flat. It surpasses using an iron condor that is adjusted to the upside or downside because then you’d not be getting ideal credit for the far OTM spread that you’d be selling due to skew.
Can you clarify this?
>So you would be using a move like this to anticipate direction, as opposed to a conventional iron condor that expects a stock to stay flat.
I would expect that in either case you want it to be flat because if it trends down you lose on the debit call side, and if it trends up you lose on the credit call side. IMO I see this and ICs to be identical in terms of their function.
Not necessarily. Say you expect AAPL to trend up but not moonshot and you want a move that is less bullish than buying a naked call or a debit call spread outright - you could use something like a broken heart butterfly.
Set it up with an ITM/OTM long call, an OTM short call, further OTM short call, and far OTM long call. So long as AAPL drifts between your short strikes you profit.
To set up something similar with an IC, your short put leg would have to be ITM - now selling an ITM short put generally goes against skew, and there is no advantage to doing that.
Ah so this would be adjusting the standard approach of buying OTM/OTM for both legs, got it. I thought it was mirroring an IC where your puts are OTM and calls are OTM and you want the price to stay within the short strikes on both sides. With skew this make more sense.
It could be set up that way but as you can see from OPs post there is no advantage to selling an ITM call. If your intention is to trade an IC because you expect the stock to trade within a range then you should just set it up as an IC with OTM calls and puts. Selling the ITM call generally works against you because of volatility smile.
I think the credit spread has to pay for the debit spread for it to be considered a broken heart.
Are you suggesting that the trade be set up for a credit instead of a debit?
Yes, the common example is a $5 debit and a $10 wide credit. You want to collect a small net credit on the trade. This way it’s not a complete waste if the underlying moves in the opposite direction.
I think that might be theoretically impossible to do, much in the same way that in theory a butterfly spread must be positive else it would be an Arb opportunity.
The reason lies in there being two different strikes for the short calls/puts, and the further OTM short strike yields too little credit to create a net overall credit. Closest I’ve come to is setting up a broken wing butterfly for a credit, where both the shorts are the same strike and I’ve one long strike far OTM which creates the credit opportunity.
EDIT: would be possible if you widen spread width but I’m not sure if the R:R is worth it, as you face a large loss in the instance of a large move against your position. In short: you might just be better off without the far OTM long strike which makes the R:R closer to a 2:1 ratio spread.
It’s possible and people do it all the time, myself included. It’s called a broken heart butterfly.
It’s just called a long condor spread with calls. It’s a bull call and a bear call together. Not sure why they don’t get more love
What about an Iron condor but with puts for those irritating stocks that are HTB?
There should be minimal assignment risk as most traders won't give away HTB shares.
You put the calls on (the lower ones) upside down and made a debit spread not a credit spread. Hence why your paying for the position. Due to the all calls one being a debit your out your debit amount plus your margin requirements for the trade. So they take up the same buying power.
>I make IC with calls and it costs me $140 upfront, though I profit only $110 ($5 less than traditional IC also lose $5 more if the planets don't align up) and still use the remaining $110 to lose on other shitty trades...
>So my question is why in the world would use traditional IC and not the Stupid IC is it just the $5 gap and not the opportunity cost of liquid money..?.
In terms of capital utilization, the trades are almost identical. The Condor requires 250 in capital but you credit 115 for a net of -135 buying power. The Call butterfly version debits 140 for a net of -140 buying power.
Puts are used for liquidity and to avoid assignment risk (although pretty much 0 unless your trade is super jacked).
tldr: both positions are basically the same, and allow equal amounts of other "shitty trades"
Imagine the strikes on a horizontal line with prices going from left to right. At the center is the ATM strike. Now have a slider attached to the price "tape" similar to something you'd see on a scale at the doctor's office. So you would move the slider along the price tape to your desired strike. In your case your slider has a 2.5 size window (the gap between your long call spread and your short call spread). In order for you to make the full potential profit, your stock would have to end up (or likely to end up) somewhere in that 2.5 wide price window by expiration.
For a low volatility stock like $T that might be more probable than a stock like $RIVN with which you don't know where it will end by the end of the week. So, what I tend to do is find stocks with high volatility that has made a big move and sell the call condor basically to say "I don't know where the stock will go by next week (strike date) but I am pretty confident it won't be here within this window". So if the stock either rockets up or plummets down, I will get to keep the premium that I sold on the condor.
In my head, it is better to say the stock wont be at a certain price range than to predict it will be at a certain price range. I'm on mobile so I don't have a way to illustrate the thought process. But hope this makes sense.
For example, this week I sold a Call Condor or rather a Call Butterfly since my Long strike is at the same strike price.
Sold 11/26 $49 Call
Bought x2 11/26 $51
Sold 11/26 $53
Net I collected about .38 or $38 per BUTTERFLY.
Max risk was $1.62 ($2 - .38)
I did this because XPEV had increased volatility due to post earnings reaction and current EV euphoria. I don't know if XPEV will pull back after that massive rally nor do I know if it will continue to rocket like LCID did. I am just confident it wouldn't be at around that range by the end of the week.
What’s this app
Robinhood, its my experiment account...
You can also use [https://optionstrat.com/](https://optionstrat.com/) to make option strategy
I believe you are describing a broken winged butterfly.
I wanna try this, would I expect a debit or credit for this
debit, with no collateral