Iron Condor Explained
An iron condor sells a call spread and a put spread around the current price. You collect premium and win as long as the underlying stays inside a range into expiration.
What it is
An iron condor is a four-leg, defined-risk credit strategy built by selling an out-of-the-money put spread and an out-of-the-money call spread on the same underlying and expiration. You sell one put and one call closer to the money, and buy one further put and one further call as protection. The net result is a credit received up front, a capped maximum loss on either wing, and a wide profit zone in the middle. It is the canonical way to sell range and time decay without taking the unlimited risk of a naked strangle. Traders reach for it when they expect a market to stay quiet and implied volatility to fall.
Payoff at expiration
When to use it
The iron condor is a short-volatility, range-bound trade. It works best when implied volatility is elevated relative to its own history (high IV rank), so the premium you sell is rich, and when you expect realised volatility over the life of the trade to come in below what the options imply. In practice a desk puts these on after a volatility spike that it judges overdone, into a market with no imminent catalyst, and picks an expiry of roughly 30 to 45 days so theta works hardest while gamma risk stays manageable. Avoid it going into earnings, an FOMC decision, or any event that can gap the underlying through a wing.
Greeks profile
| Delta | Near zero at entry — the trade is direction-neutral, built to profit from a range, not a move. |
| Gamma | Short gamma. Losses accelerate as the underlying approaches either short strike, which is why you manage before expiry. |
| Theta | Positive (long time decay). Every calm day pulls premium out of the short strikes in your favour. |
| Vega | Short vega. A drop in implied volatility helps the position; a spike in IV hurts it even if price has not moved. |
Max profit, max loss & break-evens
Max profit = net credit received (kept if the underlying finishes between the two short strikes). Max loss = width of one spread − net credit (realised if the underlying finishes beyond either long strike). Lower BE = short put strike − net credit · Upper BE = short call strike + net credit
Concrete example
SPX trades at 5,000 with 35 days to expiry. You sell the 4,850 put and buy the 4,800 put; you sell the 5,150 call and buy the 5,200 call. Each spread is 50 wide. You collect a net credit of about 12 points ($1,200 per condor). Max profit is that 12-point credit, kept if SPX expires anywhere between 4,850 and 5,150. Max loss is 50 − 12 = 38 points ($3,800) if SPX closes below 4,800 or above 5,200. Break-evens sit at 4,838 and 5,162, so you have roughly 3% of room on either side before the trade turns negative.
Risks & management
The two failure modes are a sharp directional move through a wing and a volatility spike that widens the short strikes against you. Manage before expiry, not at it: a common discipline is to take profit around 50% of the max credit and to roll or close the tested side when the underlying reaches a short strike or the loss hits roughly the credit collected. Assignment risk lives on the short options if they go in-the-money near expiry, especially around ex-dividend dates on single names. Gap risk over weekends and events is the one thing your defined-risk wings protect against, which is exactly why you never leg out of the long protection.
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