Traders confront many decisions to make once they decide to trade complex vehicles such as iron condors, butterflies or calendars. I can't speak much to the considerations a calendar trader makes. Calendars don't tend to like me; therefore, I don't tend to trade them. However, when explaining a butterfly to a relative novice, I realized again the number of decisions that go into such trades.

Let's start at the beginning, as a primer to newer traders and a reminder to experienced ones. Because all I could teach you about calendars is how to engage in a trade in which I produce a spotty profit/loss history, I won't be addressing calendars. Let's look at the other two trades we active traders often choose for our bread-and-butter income trades, the iron condor and the butterfly. The basic decisions the trader must make are these:

Which strategy?
Which underlying?
Which strikes?
What size and/or how much money to allocate to the trade?
How many days to expiration to begin?
Adjust or take off when it goes wrong?

We soon find that there are no single right or wrong combinations that work for all traders or for any trader over years with different trading conditions.

That's particularly true of the butterfly trade. A butterfly has a characteristic tent shape. A single butterfly contract is formed by selling two options to form the body of the butterfly and buying one on either side of the body, often equidistant from the body, to form the wings of the butterfly. The options can be all puts, all calls, or a combination of puts and calls.

The market is open as these theoretical trades are set up late morning on January 10, so pricing may be changing.

At-the-Money All Put Butterfly Setup:

At-the-Money Iron Butterfly:

What differences do we find in these variations? Not a lot. The strategy summaries show that upside and downside breakevens (Upper and Lower Protection on the Strategy Summaries) are roughly equal. Maximum losses are roughly equal, as are maximum profit potentials.

Of course, differences do exist. The trader pays a debit for the all-put (or all-call) symmetrical butterfly while that trader receives a credit when the iron butterfly is opened. That's enough of a difference to sway some traders toward the iron butterfly. They like the idea of receiving a credit, but their brokers are still going to require them to set aside about equal amounts of money to what was spent on the debit all-put butterfly, money that can't be employed in other trades. This amount is computed by this formula: (Distance between strikes in $)*(number of contracts)*100 multiplier - Credit Received, after Commissions.

Some traders feel that it's easier to be filled on both entry and exit on the iron butterfly because none of those options are deep in the money. If the vehicle is liquid enough, I haven't found that to be a big consideration either way, with the iron butterflies or the all-put or all-call version. I've found, however, if traders have a strong preference, it's usually for the iron butterfly. I trade bearish butterflies and I like the all-put version, but my first regular butterfly trades eons ago were OEX ATM iron butterflies.

Experienced traders likely make many of their trading decisions each month by rote, without the necessity to think much about them. However, even experienced traders might remind themselves of why they originally decided on all-put, all-call, or iron butterflies and decide whether those original reasons still work.

The next article will show initial ideas about iron condors and then we can compare the pros and cons of the two, as well as particulars about the choices we make once those decisions are made.