A short straddle earns the decay but carries a loss with no floor. Most traders who want to be short volatility want a floor. Butterflies and condors are the short straddle and the short strangle with that floor bought in.
The butterfly
A long butterfly uses three strikes, equally spaced. Sell two options at the middle strike, called the body, and buy one at each outer strike, the wings. All calls or all puts; the shape is the same. With a stock at $100, a $95/$100/$105 call butterfly buys one $95 call, sells two $100 calls and buys one $105 call.
The two wings you buy cost more than the two body options you sell, so you pay a small net debit, say $1.20. That debit is the most you can lose, whatever the stock does. The most you can make is the wing width minus the debit: $5 minus $1.20 is $3.80, earned only if the stock closes exactly at $100. The breakevens are the lower wing plus the debit, $96.20, and the upper wing minus the debit, $103.80. Plot it and you see a tent: a peak at the middle strike, sloping to zero at the wings, flat outside them.
Buy the $95 call, sell two $100 calls, buy the $105 call, 30 days out. Drag days down slowly and watch the green line rise into the tent at $100. Raise volatility and the peak flattens: the fly is short vega.
Notice how little of the tent shows with a month to go. The green line, the position today, is nearly flat: the fly is worth close to what you paid across a wide range. The tent only grows as expiry arrives, so a butterfly is a trade you hold into the final week, and the payoff near the body builds fastest there.
The iron butterfly does the same job with a short straddle as the body and a bought put and a bought call as the wings. It comes in as a credit instead of a debit, but the profit picture is identical.
The iron condor
An iron condor is a short strangle with wings. Sell an out-of-the-money put and an out-of-the-money call, then buy a further-out put and a further-out call to cap each side. Stock at $100: sell the $95 put and the $105 call, buy the $90 put and the $110 call, and collect $1.50 net. Between $95 and $105 at expiration everything expires worthless and you keep the $1.50. Below $93.50 or above $106.50 you are losing, and the loss stops at the wing width minus the credit: $5 minus $1.50, so $3.50. The flat top between the short strikes is why traders like it. The stock has room to wander.
Short the $95 put and $105 call, long the $90 put and $110 call. The note shows the credit. The loss is capped at both ends; drag volatility up to see how a vol spike marks the position down before expiry.
Why give up premium for the wings
The wings cost money, so a fly or a condor collects less than the naked straddle or strangle inside it. What you buy with that money is a known worst case, and that matters for three reasons. Your broker holds far less margin against a defined loss. A gap through your short strike overnight cannot ruin you. And you can size the trade by its maximum loss, which is how professional risk is run.
The trade-off shows at the edges. A short straddle keeps losing dollar for dollar forever; a butterfly stops losing at the wings. But the fly also earns less near the strike, because the wings you bought decay against you. Wide wings behave more like the naked trade; narrow wings cost less and pay less.
Short gamma in the middle, long in the wings
A butterfly's Greeks change sign depending on where the stock is. With the stock near the body, the two short options dominate: the position is short gamma, short vega and collects theta, like a small short straddle. Let the stock run out past a wing and the picture flips. Now the long wing option is the one nearest the money, it carries more gamma than the far-away body, and the fly turns long gamma. The same position that wanted a quiet market now wants the stock to come back toward the body, and a move that way pays it.
The fly's gamma, vega and theta against the stock price with 30 and 10 days left. Below zero near $100, above zero beyond $95 and $105. Switch Greeks and compare with the straddle chart in the last lesson: same shape at the center, far smaller, and the sign flips outside the wings.
Set the chart to gamma and look at the 10-day line: a deep dip at $100 and two small humps beyond the wings. Switch to vega and theta and the same three-part shape appears. Here is how the per-share Greeks of a 30-day, 30% vol position at $100 compare, from the same model as the charts:
| Position | Gamma | Vega | Theta per day |
|---|---|---|---|
| Long $100 straddle | +0.093 | +0.228 | -0.114 |
| Long $95/$100/$105 call fly | -0.014 | -0.036 | +0.018 |
| Short $95/$105 condor, $90/$110 wings | -0.031 | -0.076 | +0.038 |
The fly is short volatility, but a small fraction of the size of the naked trade.
The maths: fly and condor breakevens, and why the gamma flips
For a long fly with strikes K1 < K2 < K3, equal width w = K2 - K1, and net debit D: maximum loss D, maximum profit w - D at K2, breakevens K1 + D and K3 - D. For an iron condor with short strikes Kp and Kc, wings w wide and net credit C: maximum profit C between the short strikes, maximum loss w - C, breakevens Kp - C and Kc + C. Worked example: short $95 put and $105 call, long $90 and $110, credit $1.90. Breakevens $93.10 and $106.90, maximum loss $5.00 minus $1.90, which is $3.10.
The fly's gamma is Γ(K1) - 2Γ(K2) + Γ(K3), a second difference of gamma across strikes. Gamma across strikes is a bell shape. A second difference is negative where a curve bends down, at the top of the bell, and positive where it bends up, out in the tails. So with the stock near the body the fly is short gamma, and with the stock well past a wing it is long gamma. The same algebra says a narrow fly is worth about w² × the chance density of finishing at K2, which is why traders call butterflies bets on one exact price.
Your turn
Open SPY in the Strategy Lab. Sell the at-the-money call and put on the monthly expiration and read the credit: that is the body of any iron butterfly you would build around it. Then note the breakevens. The wings you add have to sit outside them to be worth paying for, and the further out they sit, the less protection they give.