Iron Condor
A neutral strategy combining bull put spreads and bear call spreads for range-bound markets — profit from low volatility and time decay with defined, capped risk.
What is an Iron Condor?
An iron condor combines two vertical spreads: a bear call spread and a bull put spread. All four options share the same expiration date. It's a market-neutral strategy designed to profit from low volatility when the underlying is expected to trade within a specific range.
Structure:
- Sell an OTM put at Strike A
- Buy a further OTM put at Strike B (lower than A)
- Sell an OTM call at Strike C
- Buy a further OTM call at Strike D (higher than C)
Strike B (Long Put) < Strike A (Short Put) < Stock Price < Strike C (Short Call) < Strike D (Long Call)
Iron Condor vs. Iron Butterfly
| Feature | Iron Condor | Iron Butterfly |
|---|---|---|
| Strike Prices | Four different strikes | Three strikes (middle two identical) |
| Profit Range | Wider profit zone | Narrower profit zone at middle strike |
| Maximum Profit | Lower (net credit) | Higher (larger net credit) |
| Win Probability | Higher (wider range) | Lower (precise target) |
| Best Market | Low volatility, range-bound | Very low volatility, pinned price |
Advantages
- Defined risk — maximum loss known upfront
- Profit in range — generates income if stock stays within range
- High win rate — wide profit zone increases success probability
- Benefits from theta — time decay works in your favor
- Lower capital than selling naked options
Disadvantages
- Limited profit — maximum gain is capped at net credit
- Four legs — more commissions and wider bid-ask spreads
- Complex management — multiple options to monitor
- Large moves hurt — losses if stock breaks out of range
- Early assignment risk on short options
When to Use
Ideal Conditions:
- Low volatility expected — anticipate stock to trade sideways
- After earnings — post-event when volatility is likely to decrease
- High IV environment — collect larger premiums
- Range-bound market with clear support and resistance
Avoid When:
- Major news events or earnings are upcoming
- High volatility or trending market expected
- Stock is near technical breakout levels
- Low implied volatility (premiums too small)
Example: XYZ at $100
- Sell 1 XYZ $95 Put @ $1.50
- Buy 1 XYZ $90 Put @ $0.50
- Sell 1 XYZ $105 Call @ $1.50
- Buy 1 XYZ $110 Call @ $0.50
Net Credit: $2.00 → Max Profit: $200
Stock stays between $95–$105 at expiration
Max Loss: $300
$500 spread − $200 credit = $300
Breakeven Points:
Lower: $95 − $2 = $93 | Upper: $105 + $2 = $107
Risk Management
- Position sizing — risk only 1–2% of portfolio per trade
- Exit at 50% profit — close when half the credit is captured
- Stop loss at 2× credit received
- Roll the untested side if stock moves toward one direction
- Close early with 7–10 days to expiration to avoid gamma risk
- Select wide strikes — sell 15–20 delta options for more room
Related Topics
Iron ButterflyBull Put SpreadBear Call SpreadNeutral StrategiesTheta DecayImplied VolatilityDefined RiskRange-Bound Markets