An iron condor is a neutral options strategy that combines four positions: two puts (one long, one short) and two calls (one long, one short), all with the same expiration date. The strategy involves four different strike prices.
The goal is to profit when the underlying asset stays within a defined price range. Maximum profit is achieved if the asset closes between the two middle strike prices at expiration. This typically happens when market volatility is low.
How It Works
An iron condor resembles a condor spread, but it uses both calls and puts rather than just one type. It’s essentially a combination of a bull put spread and a bear call spread.
Both the condor and the iron condor are extensions of the butterfly spread and iron butterfly strategies. The iron condor typically creates a net credit at entry, due to the difference in premiums between the long and short options.
Key Takeaways
- Delta-neutral strategy that profits most when the underlying price stays flat
- Built from four legs: a long put, short put, short call, and long call
- Profit is capped at the total premium (credit) received
- Risk is limited to the difference between strike prices minus the net premium
Iron Condor Structure
Here’s how to construct the trade:
- Buy one put with a strike price well below the current asset price
- Sell one put closer to the current asset price
- Sell one call slightly above the asset price
- Buy one call with a higher strike price further above the asset price
The two long options (the “wings”) are cheaper and further out-of-the-money (OTM), resulting in a net credit upon opening the position.
Profit and Loss
Maximum profit occurs when the underlying asset expires between the short strike prices. All options expire worthless, and you keep the full premium received.
Maximum loss is calculated as the width between the short and long strike prices, minus the net premium received. Add commission costs for a realistic estimate.
If the asset moves above the long call or below the long put strike, the position hits its max loss.
Example: Iron Condor on AAPL
Suppose AAPL is trading at $212.26, and you expect little price movement over the next two months. You implement an iron condor as follows:
- Sell 1 call with a $215 strike (receive $7.63)
- Buy 1 call with a $220 strike (pay $5.35)
- Sell 1 put with a $210 strike (receive $7.20)
- Buy 1 put with a $205 strike (pay $5.52)
Total credit = $2.28 (calls) + $1.68 (puts) = $3.96, or $396 per contract. That’s your maximum profit.
If AAPL stays between $210 and $215 at expiration, all options expire worthless, and you keep the full premium.
If AAPL drops to $208, your short put loses $2, but the calls expire worthless. Profit = $396 – $200 = $196.
If AAPL rises to $225, your short call loses $10, long call gains $5. Net loss = $500 – $396 = $104 + commissions.
Conclusion
The iron condor is a powerful strategy when you expect low volatility. It provides a high probability of profit, but the reward is limited and so is the risk. It’s ideal for experienced options traders who are comfortable managing multiple legs.
