What is an Iron Condor?
An Iron Condor uses four options with the same expiration. You sell a put spread below the stock and sell a call spread above the stock.
1
Buy Lower PutProtects the downside and limits loss.2
Sell Higher PutCollects premium and sets the lower short strike.3
Sell Lower CallCollects premium and sets the upper short strike.4
Buy Higher CallProtects the upside side and limits loss.Mental model: “Pay me premium because I believe the stock will remain between my two short strikes.”
When to use it
| Market View | Fit | Why |
|---|---|---|
| Stock likely stays in a range | Good fit | Maximum profit occurs between the short put and short call. |
| Neutral outlook | Good fit | You do not need a strong bullish or bearish move. |
| Expect volatility to decline | Often favorable | Lower option values may help a credit position. |
| Expect a large breakout | Poor fit | A large move can push through one side of the condor. |
| Major earnings/event ahead | Higher risk | The stock may move much more than expected. |
Worked example
Assume a stock trades near $100 and you expect it to stay roughly between $90 and $110 through expiration.
| Leg | Action | Strike | Purpose |
|---|---|---|---|
| 1 | Buy to Open Put | $85 Put | Downside protection |
| 2 | Sell to Open Put | $90 Put | Collect premium |
| 3 | Sell to Open Call | $110 Call | Collect premium |
| 4 | Buy to Open Call | $115 Call | Upside protection |
Assume the four legs together produce a $2.00 net credit.
Net Credit = $2.00 × 100 = $200
Best outcome: the stock finishes between $90 and $110 at expiration. All four options can expire worthless and you keep the full $200 credit.
Maximum profit, maximum loss, and break-even
Maximum Profit = Net Credit = $200
Spread Width = $5.00
Maximum Loss = (Spread Width - Net Credit) × 100
Maximum Loss = ($5.00 - $2.00) × 100 = $300
Lower Break-even = $90 - $2 = $88
Upper Break-even = $110 + $2 = $112
Visual range
$85 Long Put
$88 Lower B/E
$90 Short Put
$90–$110 Maximum-Profit Zone
$110 Short Call
$112 Upper B/E
$115 Long Call
Key idea: the short strikes define your preferred range. The long options farther out define your maximum risk.
What happens at expiration?
| Stock Price | Outcome | Meaning |
|---|---|---|
| $100 | Maximum profit | All options expire worthless; keep $200. |
| $95 | Maximum profit | Still between short strikes. |
| $109 | Maximum profit | Still between short strikes. |
| $88 | Lower break-even | Below this, the position loses money. |
| $85 or lower | Maximum downside loss | The long $85 put caps further loss. |
| $112 | Upper break-even | Above this, the position loses money. |
| $115 or higher | Maximum upside loss | The long $115 call caps further loss. |
Iron Condor = two credit spreads
| Side | Structure | Interpretation |
|---|---|---|
| Lower side | Buy $85 Put + Sell $90 Put | Bull Put Spread: you want price to stay above $90. |
| Upper side | Sell $110 Call + Buy $115 Call | Bear Call Spread: you want price to stay below $110. |
Combining the two spreads creates a neutral, range-bound trade with both maximum profit and maximum loss defined in advance.
Why the long options matter
$85 Long PutProtects against a very large downside move and caps the put-side loss.
$115 Long CallProtects against a very large upside move and caps the call-side loss.
The protective wings are what make an Iron Condor a defined-risk strategy.
Pros and cons
Pros
- Defined maximum loss.
- Premium is received upfront.
- You can profit without correctly predicting direction.
- Time decay can help the position.
- Flexible strike selection.
Cons
- Maximum profit is limited.
- A large move in either direction can hurt.
- Four option legs increase complexity.
- Short options carry assignment risk.
- Adjustments can become complicated.
How strike selection changes the trade
| Choice | Typical Effect |
|---|---|
| Short strikes closer to stock | Usually more premium, but a narrower safe range. |
| Short strikes farther away | Usually less premium, but more room for price movement. |
| Wider protective wings | Can increase risk and capital requirement. |
| Narrower protective wings | Can reduce maximum loss, but often reduces premium opportunity. |
Expiration considerations
| Expiration | Potential Benefit | Potential Drawback |
|---|---|---|
| Shorter-dated | Faster time decay | Less time to recover from a sudden adverse move. |
| Longer-dated | More time before expiration | Longer exposure and generally slower time decay. |
When it may be a poor choice
Avoid treating an Iron Condor as “easy income.” A large unexpected move can quickly turn the trade into a loss.
- Earnings announcements
- FDA or major regulatory decisions
- Merger or acquisition events
- Major court or litigation decisions
- Rapidly rising volatility
- Stocks already breaking out of established ranges
How to close an Iron Condor
An Iron Condor is normally opened for a credit. You can close it before expiration by buying back the four-leg position for a debit.
Open: Receive credit.
Close: Pay debit.
Close: Pay debit.
Profit = Credit Received - Debit Paid to Close
Example: collect $2.00, then later close the position for $0.60.
Profit = ($2.00 - $0.60) × 100 = $140
Iron Condor vs. other strategies
| Strategy | Typical View | Main Goal |
|---|---|---|
| Covered Call | Neutral to moderately bullish | Generate income on owned shares. |
| Cash-Secured Put | Neutral to bullish | Generate income and potentially buy shares lower. |
| Collar | Protective / cautious | Limit downside while accepting capped upside. |
| Iron Condor | Neutral / range-bound | Collect premium while expecting limited price movement. |
Beginner checklist
| Check | Question |
|---|---|
| ☐ Market view | Do I genuinely expect a range-bound stock? |
| ☐ Short strikes | Are my short strikes far enough from current price? |
| ☐ Wing width | What is my exact maximum loss? |
| ☐ Net credit | Is the premium worth the amount of risk? |
| ☐ Break-even range | What prices keep the trade profitable at expiration? |
| ☐ Events | Are earnings or major catalysts inside the trade window? |
| ☐ Liquidity | Do all four options have reasonable bid/ask spreads? |
| ☐ Exit plan | When will I close, adjust, or accept expiration? |
Key takeaway
Iron Condor = Buy Lower Put + Sell Higher Put + Sell Lower Call + Buy Higher Call
Use an Iron Condor when you expect the underlying to remain in a range and want a defined-risk premium strategy. Maximum profit is the net credit received; maximum loss is limited by the protective wings.