Iron Condor options strategy

What is an iron condor?

An iron condor is a four-leg, defined-risk strategy made of two credit spreads: an out-of-the-money bull put spread below the current price and an out-of-the-money bear call spread above it. The trader collects a net credit and keeps it in full if the underlying finishes between the two short strikes. The long options at the outer strikes cap the loss on each side.

It is one of the most widely used neutral, range-bound option strategies because it combines a wide profit zone with a known maximum loss.

When to use it and the market view

An iron condor fits a view that the underlying will stay within a range through expiration. It works best when implied volatility is relatively high, which lifts the credit, and expected to stay steady or fall. With a stock trading near $205, a trader who expects it to hold between $200 and $210 could sell the 200 put and 210 call and buy the 190 put and 220 call for protection.

Compared with an iron butterfly, the condor collects less premium but reaches maximum profit across a wider band. Compared with a short strangle, it gives up some credit in exchange for a hard cap on losses and much lower margin. Strike placement is usually based on the expected move, key support and resistance, or a target delta for the short options.

Payoff, formulas, and a 200 strike example

Let K1 < K2 < K3 < K4 be the long put, short put, short call, and long call strikes, S the expiration price, and C the net credit.

Profit = C − max(K2 − S, 0) + max(K1 − S, 0) − max(S − K3, 0) + max(S − K4, 0)

Breakevens = K2 − C and K3 + C · Maximum profit = C · Maximum loss = wing width − C

Suppose you sell the 200 put and 210 call for $5 each and buy the 190 put and 220 call for $2 each. The net credit is 10 − 4 = $6 per share ($600 per contract set), and each wing is $10 wide. At expiration:

• S between 200 and 210: all options expire worthless. Profit = +$6.
• S = 197 or 213: one short option is worth 3. Profit = +$3.
• S = 194 or 216: profit = $0. These are the breakevens.
• S = 192: profit = 6 − 8 = −$2.
• S at or below 190, or at or above 220: profit = 6 − 10 = −$4 per share ($400), the maximum loss.

Only one side can lose at expiration because the price cannot finish both below 200 and above 210, which is why brokers usually require margin for just one wing.

Maximum profit, loss, and breakeven

Measure	Formula	190/200/210/220, $6 credit
Maximum profit	Net credit	$6 per share ($600) between 200 and 210
Maximum loss	Wing width − credit	$4 per share ($400) at or beyond 190 or 220
Breakevens at expiration	K2 − credit, K3 + credit	$194 and $216

Greeks and implied volatility impact

Delta is near zero when the short strikes are placed evenly around the price. Gamma is negative and grows as the underlying approaches either short strike, especially near expiration. Theta is positive while the price stays inside the range, since the short options decay faster than the further out-of-the-money wings.

Vega is negative. A decline in implied volatility helps and a rise hurts. Because sharp sell-offs often bring higher IV, a condor can lose on both price and volatility when the put side is tested. Many traders close condors early, often at a set percentage of the maximum credit, to avoid late-stage gamma risk.

Risks to manage

Iron condors often win small amounts frequently and lose larger amounts less often; in this example, a full $400 loss erases two-thirds of the $600 maximum gain, and because condors are often closed early for only part of the credit, one full loss can offset several partial winners. Early assignment is possible on an in-the-money short leg. Four legs increase trading costs and slippage, so choose liquid underlyings with tight markets. Decide in advance whether you will roll the tested side, close the whole position, or accept the defined loss.