Iron Condor Strategy
An iron condor is a defined-risk, non-directional strategy that profits when the underlying stays within a specific price range.
The iron condor consists of four options: sell an out-of-the-money put, buy a further OTM put, sell an out-of-the-money call, and buy a further OTM call, all with the same expiration. This creates a position with two wings (the long options) that limit risk and a body (the short options) that generates premium. The maximum profit is the net credit received, achieved when the underlying stays between the two short strikes.
With SPY at $450, you sell the $440 put for $2.50, buy the $435 put for $1.00, sell the $460 call for $2.00, and buy the $465 call for $0.80. Total credit: $2.50 - $1.00 + $2.00 - $0.80 = $2.70 per share ($270 per contract). Maximum profit is $270 if SPY stays between $440 and $460. Maximum loss is $5.00 - $2.70 = $2.30 per share ($230), which occurs if SPY moves beyond $435 or $465 at expiration.
Selecting the Wings
The width between the short and long strikes determines the risk/reward profile. A $5 wide iron condor (as in the SPY example) offers a certain credit-to-risk ratio, while a $10 wide iron condor offers more premium but higher risk. The distance of the short strikes from the current price determines the probability of profit. Selling the $445/$455 iron condor when SPY is at $450 offers higher credit but lower probability of success than selling the $440/$460 iron condor. Many traders aim for a probability of profit around 70-85% by placing strikes 1-2 standard deviations from the current price.
Managing an Iron Condor
As expiration approaches, theta decay accelerates, benefiting the position if the underlying remains range-bound. If the stock moves toward one of the short strikes, you can adjust by rolling the tested side up or down to collect additional credit and widen the range. Some traders close the position at 50% of maximum profit rather than waiting for expiration, reducing gamma risk in the final days. If the underlying breaches a short strike, it's often prudent to close the entire position or convert to a different strategy.
FAQs
What is the maximum profit on an iron condor?
The maximum profit is the net credit received. If you collect $2.70, that is your best possible outcome, achieved when the underlying is between the two short strikes at expiration.
What happens if the stock moves beyond the wings?
Your loss is capped at the width of the wing minus the credit received. With $5 wings and $2.70 credit, your maximum loss is $2.30 per share. The long options protect you from unlimited losses.
When should I avoid iron condors?
Avoid iron condors before major earnings announcements orFed meetings when implied volatility is high. The premium is tempting, but the expected move may exceed your strikes. Also avoid in strongly trending markets where directional risk overwhelms the range-bound premise.