Iron Condor
A short put spread plus a short call spread for maximum income in a range-bound market.
Profit / Loss Diagram
Iron Condor at expiration
What is this strategy?
The Iron Condor is an advanced neutral premium strategy generating income from two simultaneous credit spreads: a bull put spread (sell a put near the money, buy a lower one) and a bear call spread (sell a call near the money, buy a higher one). The result is a payoff profile that earns the full credit if price stays between the two short strikes — the condor’s comfort zone — with limited, defined losses on either side if price travels beyond them.
The Iron Condor is popular with neutral traders because it generates income from two theta sources at once. The maximum-profit zone between the short strikes is relatively wide, typically 15–20% of the underlying price, allowing moderate market moves without impact on P&L. The net credit received is maximum gain; the strike width minus that credit is maximum loss.
The Iron Condor requires moderate margin and suits experienced options traders seeking consistent income with well-defined risk. It works best in markets without clear direction but with expectations of contained volatility. Management is critical: monitor the individual legs and be ready to adjust or close if price approaches either short strike.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Put (ATM/OTM) | ATM or slightly OTM | 30-45 DTE | -1 RUT 200 Put |
| BUY | 1 Put (OTM) | Lower OTM | Same expiry | +1 RUT 190 Put |
| SELL | 1 Call (ATM/OTM) | ATM or slightly OTM | Same expiry | -1 RUT 210 Call |
| BUY | 1 Call (OTM) | Higher OTM | Same expiry | +1 RUT 220 Call |
Example
Scenario: RUT at $205, neutral outlook, low expected volatility. You set risk boundaries at $195 and $215.
- Put Sold (200) -1 RUT 200 Put @ $2.50
- Put Bought (190) +1 RUT 190 Put @ $0.75
- Call Sold (210) -1 RUT 210 Call @ $2.50
- Call Bought (220) +1 RUT 220 Call @ $0.75
- Net Credit +$350 (2.50+2.50−0.75−0.75 × 100)
- Maximum Gain $350 (if RUT stays between 200 and 210 at expiry)
- Maximum Loss $650 (10-wide − 3.50 credit × 100)
- Breakeven (Put side) $196.50 (200 − 3.50)
- Breakeven (Call side) $213.50 (210 + 3.50)
The Greeks
The deltas of the put and call spreads cancel out, keeping price exposure neutral within the profit zone.
Two short legs make theta strongly positive. Decay works for you every day the price stays inside the range.
Two credit spreads give negative vega. Rising IV hurts the position; you want falling or already-low volatility.
Gamma is negative near the short strikes and neutral in the middle. Large moves produce accelerating gamma losses.
Position Management
- 01 Monitor Both Wings Set alerts at both short strikes. If price moves toward either wing — especially inside 7 days to expiration — consider adjusting or closing.
- 02 Close Early on Partial Profit Do not chase maximum gain. Close the full position once you have captured 50–75% of the net credit. It cuts the risk of multiple assignment.
- 03 Adjust a Wing if Needed If one wing is threatened, you can close that side and let the other run, converting the position into a simple credit spread.
- 04 Use Defined Stop Losses Set a total stop if the position moves beyond 2–3× the net credit. Do not wait for maximum loss; manage risk dynamically.
- 05 Redeploy in New Cycles After closing a winner, look for new Iron Condors in upcoming expirations, choosing strikes according to current IV.