Iron Condor

An iron condor combines a bull put spread below the market with a bear call spread above it, all with the same expiration. You collect a credit from both spreads. If the underlying stays between the two short strikes until expiration, every option expires worthless and you keep the full credit. If it breaks out beyond either spread, losses are capped by the long options. Iron condors are one of the most popular ways to sell premium with defined risk in range bound markets.

Construction#

The short strikes define the profit range; the long strikes cap the loss.

Payoff at a glance#

Worked example#

Choosing strikes#

• Short strikes by delta: many traders sell around the 10 to 20 delta options on each side, which places the range about one standard deviation away. See Delta.
• Short strikes by levels: outside clear support and resistance. See Support and Resistance.
• Width: wider wings collect more credit but increase the maximum loss.
• Balance: equal distances give a neutral position; skewing strikes adds a directional tilt.

When iron condors work#

• Implied volatility is high relative to expected movement, so premiums are rich. See IV Rank and IV Percentile.
• No major events before expiry.
• Range bound markets with low trend strength. See Range Trading.

Managing iron condors#

• Take profits at 50% of the credit; holding for the rest adds risk with little reward.
• Close at about 21 days to expiry to avoid rising gamma.
• Adjust when tested: if price approaches one side, roll the untested side closer to collect more credit, or roll the tested spread further out in time.
• Set a loss limit, such as two times the credit received.

Risks#

• Breakouts: one strong move can wipe out the profits of several winning trades.
• Volatility spikes raise the value of the short options.
• Gap risk over weekends and news.
• Costs: four legs to open and possibly four to close.
• Early assignment on a short leg in American style products. See Exercise and Assignment.

Iron condor vs short strangle#

A short strangle sells the same put and call without buying the protective wings. It collects more premium but has no cap on losses. The iron condor's wings make the risk defined, which is why it is preferred for most traders. See Strangle.

Frequently asked questions#

What is an iron condor?#

A four leg options strategy that sells an out of the money put spread and an out of the money call spread, profiting if the underlying stays between the short strikes.

What is the maximum loss on an iron condor?#

The width of the wider spread minus the net credit received, multiplied by the contract size.

When should you use an iron condor?#

When you expect the underlying to stay in a range and implied volatility is relatively high, without major events before expiry.

Next, learn the tighter version in Iron Butterfly.