The Iron Condor: A Defined-Risk Strategy for Range-Bound Markets

An iron condor is a neutral options strategy that profits when the underlying stays within a range until expiration. It combines a bull put spread below the price with a bear call spread above it. The risk is defined on both sides, which makes it popular with traders who want to sell premium without unlimited risk.

The four legs

1. Buy a put with a low strike (protection).
2. Sell a put with a higher strike.
3. Sell a call with a strike above the current price.
4. Buy a call with a higher strike (protection).

All with the same expiration. You receive a net credit.

Worked example

A stock trades at $100. You open a 30-day iron condor:

• Buy the $85 put for $1.00
• Sell the $92 put for $2.50
• Sell the $108 call for $2.50
• Buy the $115 call for $1.00

Net credit: $2.50 + $2.50 − $1.00 − $1.00 = $3.00, or $300 per condor.

• Maximum profit: $300, if the stock is between $92 and $108 at expiration.
• Width of each spread: $7.
• Maximum loss: ($7 − $3) × 100 = $400, if the stock is below $85 or above $115.
• Break-evens: $92 − $3 = $89 and $108 + $3 = $111.

What drives the trade

An iron condor typically has:

• Positive theta: it benefits from time passing. See theta decay.
• Negative vega: it benefits from falling implied volatility.
• Near-zero delta at the start, which changes as the price moves toward a short strike.
• Negative gamma: large moves hurt, and they hurt more near expiration.

Managing an iron condor

• Take profit early. Many traders close at 50% or so of the maximum profit rather than waiting for the last few dollars, which come with the highest gamma risk.
• Have an exit rule for losses, such as closing if the loss reaches a multiple of the credit or if the price touches a short strike.
• Adjust or roll the threatened side, knowing that each adjustment changes the risk.
• Watch events. Earnings and major news can move the price through both your break-evens.

The win rate trap

Iron condors with wide strikes win often but lose more on losers than they make on winners. A 75% win rate with the payoff above is not automatically profitable. Track results in R and profit factor, not just win rate.

In TradeThink

Multi-leg trades are grouped together, and the risk profile draws the payoff at expiration and today with break-evens, maximum profit and maximum loss. You can widen or pan the price range on the chart to see the full shape. Related: the iron butterfly and butterfly spreads.