Iron Condor
An iron condor is a defined-risk, limited-profit options strategy built from a short out-of-the-money call spread and a short out-of-the-money put spread using the same expiration date. It is commonly used when a trader expects the underlying to stay within a range, implied volatility to contract, and time decay to work in the seller’s favor.
An iron condor combines two out-of-the-money credit spreads: a bull put spread below the market and a bear call spread above the market. All four options use the same expiration, and the long options sit farther out than the short options to define the position’s risk.
In practical terms, the iron condor is a short strangle with protective wings. It keeps the neutral, premium-selling logic of a short volatility trade while capping the worst-case loss on both sides.
The short put and short call create the premium intake and define the profitable center zone. The long put and long call cap downside and upside risk, making the trade limited risk and limited reward.
Traders often choose an iron condor when they want a high-probability, range-based premium-selling structure but do not want the undefined tail risk of a naked short strangle or short straddle. It is designed for markets where movement is expected to remain contained between the short strikes.
The trade is opened for a credit, and that initial credit is the most you can make. Maximum profit occurs if the underlying finishes between the short put and the short call at expiration, allowing all four options to expire worthless.
Losses begin once price moves beyond either short strike. Because the wings are purchased farther out, the loss is capped once price moves through the long put on the downside or the long call on the upside.
The lower breakeven is the short put strike minus the total credit received. The upper breakeven is the short call strike plus the total credit received. Between those two breakevens, the position is profitable at expiration.
Example: Stock at 100
Suppose you sell the 95 put and buy the 90 put, while also selling the 105 call and buying the 110 call. If the total credit collected is 1.60, the iron condor is a 5-point wide structure with defined risk.
Maximum profit: 1.60, or $160 per 1-lot before fees.
Maximum loss: 5.00 – 1.60 = 3.40, or $340 per 1-lot before fees.
Lower breakeven: 95.00 – 1.60 = 93.40
Upper breakeven: 105.00 + 1.60 = 106.60
If the stock expires anywhere between 95 and 105, both short options expire worthless and the full credit is kept. Between 93.40 and 95, or between 105 and 106.60, the trade is still profitable but profit is shrinking. Beyond those breakevens, the position loses money, with losses capped outside the long strikes.
Theta: The position generally benefits from time passing, because the two short options lose value faster than the long wings when the underlying remains contained.
Vega: The iron condor is typically short vega. A drop in implied volatility helps compress the value of the spreads, while a rise in implied volatility can hurt the mark-to-market of the position.
Gamma: The trade is short gamma. As the underlying moves toward one side of the structure, directional exposure becomes more adverse and losses can accelerate faster than many newer traders expect.
The expiration payoff diagram shows the final shape, but real P&L before expiration is smoother and more dynamic. Time remaining, changes in implied volatility, and the speed of the underlying move all affect the position’s mark-to-market value.
This means an iron condor can sometimes be closed profitably before expiration even if price has not stayed perfectly centered, provided time decay and volatility contraction offset the move. It also means a position can show a loss even while price remains between the short strikes if volatility expands significantly.
When it fits
- Implied volatility is relatively rich.
- You expect the underlying to stay in a range.
- You want defined risk rather than naked exposure.
How the trade wins
- Time passes without a major move.
- Implied volatility contracts after entry.
- Price remains between the short strikes.
How the trade loses
- The stock trends hard toward one wing.
- Implied volatility rises meaningfully.
- The condor is placed too narrow for the expected move.