When traders are first exposed to spreading strategies like butterflies and iron condors, one of the first questions they always ask us is, “Can you recommend a book that goes into these strategies in more detail? Where can I learn more?” We’ve had to reply that there aren’t really any books that discuss iron butterflies and iron condors in much detail - until now. Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors, by Anthony J. Saliba, with Joseph C. Corona and Karen E. Johnson (Bloomberg Press: 2008), is the first text we’ve seen devoted entirely to market neutral spreading strategies, and is also the first book for general readers to really delve into multi-legged options spreads.
The book succeeds in several areas. It clearly explains the structure and characteristics of strategies that, on first glance, may seem prohibitively complex. Every strategy is presented as practically as possible, always in the context of risk characteristics and the profits/losses at possible outcomes. Each chapter concludes with exercises, a quiz, and answer keys - they aren’t overly difficult, and they assess the most important aspects of the material. One nice feature is that the authors don’t try to reach for the lowest common denominator: this is not a book for someone who has never traded options before, and it is refreshing in a book this practical to be spared explanations of what puts and calls are.
Our complaints are few. Although nobody reads an options trading book for the entertainment value, this text is particularly austere. Except for the concluding interview with the author, the book reads more like a manual or workbook than anything else. This is hardly a criticism: explaining wingspreads is not a task for which a strong narrative voice is required. But at times, the risk graphs and profit/loss tables are so prolific that they break up the body of the text and become distracting - after you encounter the nth decomposition diagram, they all start to look the same.
The first chapter explains what the authors mean by a “directionless market,” how to identify one, and why options can be used to profit from such environments. As an aside, we really tire of the perception in much of the financial press that the only uses of options are a) insane speculation and b) panicked put-buying. Option Strategies for Directionless Markets (and, we humbly submit, our blog) amounts to a demonstration that in fact options are the only instrument that can profit reliably from the mere passage of time, and in that way can function in a relatively conservative rather than speculative role.
The next two chapters lay out the basics of butterflies and condors. Chapters four and five cover the Greeks, in theory and in practice, and what’s notable here is that gamma and vega are given as much attention as delta and theta (sorry, rho). This is in contradistinction to many trader-oriented books on options, which often rush through gamma and vega as quickly as possible; obviously, that won’t work for strategies, like butterflies and condors, that depend so much on an adequate understanding of those variables.
Chapters six and seven get into the real meat of these strategies, covering the iron variations of butterflies and condors, as well as broken-wing spreads and iron condors with gaps between the short strikes - which are the sorts of trades we publish in our newsletter. (Saliba et al. call these latter trades “iron pterodactyls,” a designation that, for whatever reason, hasn’t really seen widespread usage.) Chapter eight brings it all together, showing how the different strategies relate to one another and can be applied in different market contexts based on movement in price and volatility. The book concludes with an interview with Saliba, a final exam, and a concise glossary.
We covered the primary advantages of the book above, but several other features are worth mentioning. Obviously, we’re really glad to see four-legged wingspreads finally get some attention in book form. And one of the nice things about the latter part of the book is the presence of some pretty advanced topics, like the synthetic equivalence of “guts” and “classic” butterflies and condors, or the use of box spreads to demonstrate that credit and debit wingspreads are synthetically equivalent once interest rate components are factored in. Saliba explains that traders shouldn’t prefer iron “classic” credit butterflies and condors over the “guts” debit versions because there’s anything special about bringing in cash up front (there isn’t); factors like better liquidity, tighter spreads, and lower execution risk are the real reasons to trade OTM wingspreads.
Rating: 5 out of 5. Even if this weren’t the only book in existence discussing in detail the purpose and structure of butterflies, condors, and their iron variations, it would likely remain the best. Explanations are clear and concise, and while this isn’t a book for complete options novices, one needn’t have any prior experience with the strategies discussed. Along with the classic Natenberg book, we consider Option Strategies for Directionless Markets required reading.