Iron Condor¶
OVERVIEW¶
An iron condor is a four-leg options strategy constructed by selling an out-of-the-money put spread and an out-of-the-money call spread at the same expiration on the same underlying. The trader collects a net credit up front, keeps the full credit if the underlying expires between the two short strikes, and caps losses at the width of either wing minus the credit received. It is a short-volatility, range-bound strategy — the position profits from time decay and falling implied volatility, and loses from large directional moves in either direction.
CONSTRUCTION¶
Four legs, all at the same expiration:
| Leg | Action | Strike | Position |
|---|---|---|---|
| 1 | Sell | K₁ — OTM put below spot | Short put |
| 2 | Buy | K₀ — further OTM put (K₀ < K₁) | Long put wing |
| 3 | Sell | K₂ — OTM call above spot | Short call |
| 4 | Buy | K₃ — further OTM call (K₃ > K₂) | Long call wing |
Key formulas (equal wing width = W):
| Metric | Formula |
|---|---|
| Max Profit | Net credit received |
| Max Loss | W − Net credit |
| Lower Breakeven | K₁ − Net credit |
| Upper Breakeven | K₂ + Net credit |
| Profit Zone | Price stays between K₁ and K₂ |
WORKED EXAMPLE¶
SPY trades at $520, 30 days to expiration, IV around 15%.
| Spread | Legs |
|---|---|
| Put spread | Sell 515 put / Buy 510 put |
| Call spread | Sell 525 call / Buy 530 call |
| Metric | Value |
|---|---|
| Net credit collected | $1.50 per share ($150/contract) |
| Wing width | $5.00 |
| Max loss | $3.50 per share ($350/contract) |
| Lower breakeven | $513.50 |
| Upper breakeven | $526.50 |
Tip
If SPY closes at $522 on expiration, all four legs expire at favorable points for the trader — the 515 put and 525 call expire worthless, the long wings also expire worthless, and the trader keeps the full $150. If SPY closes at $532, the 525/530 call spread reaches max loss of $5.00, netting a $3.50 loss ($350) after the credit is applied.
WHEN TO USE¶
Delta-neutral income traders sell iron condors on index ETFs like SPY, QQQ, and IWM when implied volatility is elevated relative to realized volatility — they are effectively short the variance risk premium. The strategy is most attractive when IV rank is above 30 and the trader expects the underlying to chop rather than trend. Many systematic traders open condors at 30–45 DTE, target 50% of max profit as a close signal, and cut losses at 2× credit received.
Systematic entry and exit guidelines used by options traders:
| Parameter | Common Practice |
|---|---|
| Days to expiration at open | 30–45 DTE |
| Profit target | 50% of max credit received |
| Stop loss | 2× credit received |
LIMITATIONS AND RISKS¶
The risk-reward is asymmetric — in the SPY example, a trader risks $350 to make $150, roughly 2.3-to-1 against. Win rate must exceed the implied probability embedded in that ratio (about 70%) just to break even.
| Risk Factor | Detail |
|---|---|
| Asymmetric risk-reward | Risking ~$350 to make ~$150 requires a win rate above ~70% just to break even |
| Negative gamma near expiration | A sudden move through a short strike in the final week can erase the full credit in hours |
| Commission drag | Up to four legs on entry and four more on exit |
| Early assignment risk | Short puts on stock condors may be assigned early around ex-dividend dates |
| Wider wings ≠ better EV | Selling wider wings increases max loss without improving expected value |
Note
Iron condors carry heavy negative gamma as expiration approaches. Monitor positions closely in the final week before expiration.