Iron Butterfly Weekly

Friday's extreme gamma makes the position unmanageable. A small stock move can swing your P&L dramatically. You also face pin risk and assignment uncertainty. Exit Thursday to avoid these issues while capturing ~70% of the theta.

It depends on perspective. Butterfly has higher max profit but narrower profit zone and lower probability of any profit (~50% vs ~65% for condor). It also has much higher gamma, making it more sensitive to moves. Risk/reward differs; neither is universally 'riskier.'

Achieving max profit requires the stock to pin exactly at the center strike - very unlikely. Taking 25-30% profit happens more frequently (~50-60% of trades), captures significant edge, and reduces gamma exposure. It's the optimal balance.

Yes. Iron butterflies have defined risk (max loss = wing width - credit). Both the short put/call and long wings create a defined-risk structure acceptable for TFSA. Margin required equals max loss.

Use the nearest available strike as your center. If the stock is at $32.15 and strikes are $32 and $33, use $32. You'll start slightly off-center, but this is acceptable. Major gaps from center should make you reconsider the trade.

ATM options have the highest vega (IV sensitivity). When IV drops, ATM options lose the most value. Butterflies with ATM short strikes benefit maximally from IV crush, while condors with OTM strikes benefit less.

Monday/Tuesday gives you 3-4 days to capture theta while gamma is still manageable. Wednesday/Thursday entries start with higher gamma and less time for theta to work. The theta/gamma ratio favors early-week entry.

If the gap is significant (stock through breakeven), consider exiting immediately - your thesis is broken. If the gap is moderate, assess your delta and remaining time. The key is not to hold hoping for recovery when the position is severely challenged.

Rolling weekly butterflies rarely makes sense due to the short time frame. Rolling costs money (closing losing + opening new), and you're better off cutting the loss and entering fresh next week. Only roll if the debit is minimal and your view is intact.

'Regular' butterfly (call butterfly or put butterfly) uses all calls or all puts and has different margin treatment. Iron butterfly uses puts below and calls above the center, creating a defined-risk iron structure. Iron butterflies are more capital-efficient for most retail traders.

Calculate daily theta ÷ gamma dollar risk. Example: $15 daily theta ÷ $50 gamma P&L impact for 1% move = 0.30 ratio. When this ratio drops below ~0.2 (typically Thursday PM), gamma risk outweighs theta benefit. Exit when ratio becomes unfavorable.

Need intraday option prices (hourly minimum) because exit timing matters. Simulate entries Mon/Tue, track daily P&L through multiple exit triggers (profit target, stop, time, delta), measure outcome distribution. Validate with out-of-sample and paper trading.

Multiple butterflies accumulate negative gamma. In a market move, all lose together, and losses compound (gamma losses are quadratic). Cap total butterfly exposure and consider that aggregate gamma risk is higher than sum of individual position risks in correlated moves.

EV = (Win Rate × Avg Win) - (Loss Rate × Avg Loss). For butterflies with 50% win rate, $20 avg win, $15 avg loss: EV = 0.50 × 20 - 0.50 × 15 = $2.50. Small changes in any variable significantly impact EV. Track actual outcomes to refine estimates.

Convert when: (1) Stock moved but you believe it will stabilize at new level, (2) Cost to convert is less than closing loss, (3) New condor structure has positive expected value. Usually, closing is simpler and better for weekly timeframes.