Iron Condor

Type: Concept

Category: Finance

Difficulty: Advanced

Reading time: 5 min

Definition

An iron condor is a four-leg options structure that profits when the underlying stock or index stays within a defined price range through expiration. The position is built by combining two credit spreads on opposite sides of the current price:

1. Short put spread below the market: sell an out-of-the-money put, buy a further-out-of-the-money put.
2. Short call spread above the market: sell an out-of-the-money call, buy a further-out-of-the-money call.

All four legs share the same expiration date. The two short strikes form the “wings” — the boundary within which the trade is fully profitable. The two long strikes serve as defined-risk hedges, capping the maximum loss on each side. The trader collects a net credit upfront and keeps the full credit if the underlying expires anywhere between the two short strikes.

The structure is market-neutral in direction (no view on whether the stock rises or falls) but directional in volatility — the trader is short volatility and short time. Iron condors thrive on stocks and indices that grind sideways or oscillate within a range; they bleed when volatility expands or the underlying breaks decisively in either direction.

Why it matters

Key takeaways

• Four legs, one expiration. Sell OTM put + buy further-OTM put + sell OTM call + buy further-OTM call. Net credit at entry.
• Maximum profit = net credit received. Realized if the stock expires between the two short strikes.
• Maximum loss = wider wing's spread width × 100 − net credit. Realized if the stock expires beyond either long strike.
• Probability profile: high probability of small win, low probability of larger loss. The structure inverts the typical bet — frequent small gains, occasional larger losses.
• Best in low-IV environments where the market expects calm. Selling premium when IV is high but the underlying truly is range-bound is the ideal setup.
• Requires margin account with Level 3 or higher options approval at most brokers. Capital requirement = max loss per condor.

The payoff geometry

click to zoom

The four legs of an iron condor and the price zones they create.

Read it as: The two long wings ($90 and $110) define the worst-case loss. The two short strikes ($95 and $105) define the profit zone — anywhere the stock closes between them at expiration, the entire net credit is kept. Beyond either short strike, profit erodes; beyond either long strike, the max loss is reached.

Manage before expiration

Holding an iron condor through expiration week exposes the position to gamma — small intraday moves can flip the trade between profit and loss rapidly. Most disciplined condor traders close at 25–50% of max profit early in the cycle, or roll the threatened side if the underlying approaches a short strike with time remaining.

Where it goes next

Related

Chapter 25: Iron Condors and Neutral Strategies Setup, management, and adjustment playbook for the canonical neutral premium-selling trade. Defined Risk The structural principle behind iron condors — every short leg is paired with a long hedge. Calendar Spread An alternative neutral strategy that profits from time-decay differentials rather than range-bound price action.