Iron Condor

An iron condor sells a band of calm — it collects premium and keeps it as long as the stock stays inside a range through expiration.

What an iron condor is made of

An iron condor combines two credit spreads on the same stock and the same expiration, using four strikes and both option types:

• An out-of-the-money put spread below the stock: sell a put, buy a further-out put for protection.
• An out-of-the-money call spread above the stock: sell a call, buy a further-out call for protection.

You collect a net credit when you open it. The two bought options (the wings) are what make the risk defined — without them you would be selling naked options. For the difference between selling for a credit and paying a debit, see debit versus credit spreads; for why the long wings cap the risk, see defined versus undefined risk.

What it is betting on

An iron condor profits if the stock stays between the two short strikes (the inner sold put and the inner sold call) through expiration. It is a neutral, range-bound position — no strong directional view, just an expectation that the stock will not travel far.

The shape of profit and loss

• Max profit = the net credit received. You keep all of it if the stock finishes between the two short strikes, where every option expires worthless.
• Max loss = the width of one spread minus the net credit. Only one side can be breached at expiration — the stock cannot be below your put spread and above your call spread at the same time — so you do not subtract both widths.
• Breakevens = the short put strike minus the credit, and the short call strike plus the credit.

A worked example

Suppose a stock trades near 100. You sell the 95/90 put spread and the 105/110 call spread — each spread is five points wide — for a total net credit of 1.50 (150 dollars per one-lot, since each contract covers 100 shares).

• Max profit: the 1.50 credit (150 dollars), kept if the stock finishes anywhere between 95 and 105.
• Max loss: 5.00 spread width minus 1.50 credit = 3.50 (350 dollars), reached if the stock finishes at or below 90, or at or above 110.
• Lower breakeven: 95 − 1.50 = 93.50.
• Upper breakeven: 105 + 1.50 = 106.50.

The stock can wander anywhere from 93.50 to 106.50 and the position still finishes at or above break-even. The profitable zone is wide; the catch is what happens beyond it.

Time decay and volatility

An iron condor is a short-premium position, so the passage of time generally works in its favor — the options it sold lose value as expiration approaches (positive time decay). The trade-off is that a sudden jump in implied volatility, or a large move in the stock, works against it, because the options it is short become more valuable to the buyer.

The honest failure mode

The danger is a decisive move or a volatility spike that pushes the stock through one of the short strikes and out past a wing before expiration. Because the maximum loss exceeds the maximum gain, the structure relies on the range holding most of the time and on the trader never sizing any one condor large enough that a full loss is unrecoverable. Tighter cousins exist that collect more premium for a narrower range — see the iron butterfly — and the same range-bound idea can also be built as a debit condor.

Educational only — not investment advice. Options involve a substantial risk of loss and are not suitable for every investor.