These are both 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. This is what you might call a “strangle”.
Which is Better?
The Iron Condor
would be better than the more narrow strike Iron Butterfly. The downside of using an Iron Condor is that when it
does go against you, it is more difficult to repair and/or you can lose more
money because you took in less premium, by selling options that were further
from the money.
Overall, though, it does have a good probability of profit
greater than that of the Iron Butterfly.
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.
Risk-To-Reward
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.
Volatility
Even though it is short volatility, it still performs well, even
in lower volatility markets because of the risk reward.
Of course, 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 roam.
However, overall in most markets, I preferred the Iron Butterfly, because of
the increase risk reward.
