Part XII · Strategy atlas · Chapter 12C

Intermediate strategies

Spreads, condors and calendars

1 · How to read this tier

Each main entry opens with a card, as in Chapter 12B, and its mirror image follows in a short paragraph. Strikes are numbered from lowest to highest, $K_1 < K_2 < K_3 < K_4$, and $W$ is the width between two adjacent strikes. A structure sold for a net credit collects $C$, and one bought for a net debit pays $D$, both per share or per index point. The underlying's price at expiry is $S_T$, and dollars are points times $100.

As in Chapter 12B, the premiums in the examples are round, illustrative numbers, below what a pricing model gives. The formulas hold at any premium.

2 · Credit spreads

A credit spread sells an option and buys a cheaper one further out of the money, on the same underlying and expiry. The bought option caps the loss, and the net credit is the most the spread can make. Both credit spreads here are vertical spreads.

Bull put spread

The bull put spread fits moderately rising or flat markets that stay above $K_2$. Because its loss is defined, you can hold it in a margin account without the open-ended exposure of a naked put, whose loss runs all the way to the strike less the premium.

It fails when the underlying drops below $K_1$ and the spread takes its full loss, which traders call a wing break. The "defined risk" frame can lull traders into over-sizing. The loss per spread is bounded, but per dollar of credit collected the loss-to-credit ratio is often 3 to 5 times.

Bear call spread

The bear call spread fits moderately falling or flat markets that stay below $K_1$. It is often paired with a bull put spread to form an iron condor.

3 · Neutral structures

Iron condor

An iron condor is a bull put spread below the price and a bear call spread above it. The bought options at the outside strikes are its wings. The index can finish beyond only one wing, so the loss is that of one spread less the whole credit. With wings of unequal width, the wider one sets the maximum loss.

The condor fits best when expected realized volatility is meaningfully below implied volatility. It fits worst when the underlying breaks out of the inner strikes.

The CNDR, the Cboe S&P 500 Iron Condor benchmark index, has materially underperformed SPX since its inception. The underperformance is consistent across the available CNDR history, from a backtest start in 1986 to live values since 2007. That strongly suggests the structure is unattractive for most retail implementations, though results vary with transaction-cost assumptions, sizing rules and the comparison period. The PUT index, by contrast, sells systematic at-the-money cash-secured puts rather than condors, and has historically delivered competitive risk-adjusted returns (Bondarenko 2019). The lesson is specifically about the iron condor structure, not about systematic premium selling in general.

The figure draws CNDR against the S&P 500's total return and price return, each indexed to 100 at the end of June 1986 and drawn on a log scale. All three series are synthetic, illustrative stand-ins, not market data, as the caption says. Checkboxes show or hide the two S&P series and the event markers. Readouts give each series' compound annual growth over the 38.5 years and the total-return index's multiple of CNDR at the end of 2024. Turn on the price-return line, and watch where CNDR falls at each marked episode.

SPX total return

SPX price return

event markers

CNDR CAGR = 3.61%

SPX TR CAGR = 11.00%

SPX PR CAGR = 9.56%

TR / CNDR ratio = 14.16×

The stand-in CNDR line drops hardest at the four marked stress episodes: Black Monday, the global financial crisis, Volmageddon and the COVID crash. It ends far below both S&P lines. Its readouts, 3.61% a year for CNDR against 11.00% for the total-return index and a multiple of 14.16, describe the stand-in series only. The Edge Book reports that the real CNDR returned approximately 690% from 1986 to 2024, against approximately 5,500% for the SPX Total Return index: about 5.5% a year against 11% (Chapters 1D and 10I). The stand-in doubles the real gap, so read the figure for its shape, not its numbers.

The two traditions this book draws on disagree about what to do with this evidence, and both positions stand. This atlas teaches the condor as an intermediate structure for when realized volatility is expected to fall short of implied, sized small. The Edge Book rejects systematic iron condors for retail accounts on the CNDR record. It allows only occasional, discretionary condors at extreme implied volatility, sized small (Chapter 10I). Read Chapter 10I before you trade one.

Iron butterfly

The iron butterfly is an iron condor whose inner strikes have met at one strike. It is the most aggressive premium-selling structure of the tier. Use it only with a very specific reason to expect pinning at $K$. With a hypothetical credit of 35 points on wings 50 points wide around 6,000, it would break even at 5,965 and 6,035 and lose at most 15 points.

Long call butterfly

A butterfly spread is a bull call spread and a bear call spread that share the middle strike. The slope rule of Chapter 12A shows its tent shape: +1 from $K_1$ to $K_2$, then −1 from $K_2$ to $K_3$.

A long put butterfly is the same structure built from puts: buy one put at $K_1$, sell two at $K_2$, buy one at $K_3$. By put-call parity it has the same payoff as the call butterfly, with the same maximum profit, maximum loss and breakevens (Chapter 5F).

4 · Calendar spreads

A calendar spread trades one expiry against another at the same strike. At the near expiry its value is the far option's price, with time still left on it, less the near option's payoff. That value depends on the implied volatility at the time, so a calendar has no closed-form breakeven. You can bound its loss, but you have to price its profit with a model.

Calendar call spread

At the strike, the short near-dated call carries more gamma than the long far-dated one, so the calendar is short gamma there. Far from the strike the near call's gamma fades first, and the net gamma turns positive. The calendar collects the near leg's faster time decay and owns the far leg's larger vega.

It fits best when near-term IV is high relative to forward IV, with the term structure in backwardation, and you expect it to revert. It fits worst in trending markets that move far through the strike.

A calendar put spread is the same forward-volatility structure built from puts, often chosen when put skew is richer.

Diagonal call spread

The typical form, a deep in-the-money long call with near-dated calls sold against it, is the poor man's covered call: the long call stands in for the shares. Like a calendar, a diagonal spread has no closed-form breakeven.

A diagonal put spread is the mirror image on the put side.

5 · Debit spreads

A debit spread buys an option and sells a cheaper one further out of the money. The sold option pays for part of the bought one and caps the gain.

Bull call spread

The bull call spread is also called a long call spread.

A bear put spread, or put debit spread, is the mirror image: buy a put at $K_2$ and sell one at a lower strike $K_1$ for a debit $D$. Its maximum profit is $(K_2 - K_1) - D$, its maximum loss $D$, and its breakeven $K_2 - D$. It has the same risk and reward structure as the bull call spread.

6 · Directional and volatility structures

Long straddle

The long straddle fits best when realized volatility exceeds the implied volatility you paid at entry. It fits worst in calm regimes.

A long strangle buys an out-of-the-money put at $K_1$ and an out-of-the-money call at $K_2$. It is cheaper than a straddle but needs a bigger move to break even. For a debit $D$, the maximum loss is $D$, anywhere between the strikes, and the breakevens are $K_1 - D$ and $K_2 + D$.

An inverse iron butterfly or inverse iron condor reverses every leg of its credit version, making a defined-risk long-volatility bet. You pay a debit $D$ and profit as the price moves away from the body. The maximum loss is $D$, at the body or between the inner strikes, and the maximum profit is $W - D$, beyond either wing. The breakevens are $K \pm D$ for the butterfly and $K_2 - D$ and $K_3 + D$ for the condor.

Collar

A collar is a protective put paid for by a covered call. The "JPM Hedged Equity Fund" collar is this structure on SPX.

7 · Check yourself