Iron Condor
Overview
An iron condor is a neutral options strategy that profits when the underlying stays within a range. It combines a bull put spread and a bear call spread.
Setup
- Sell 1 OTM put (lower strike)
- Buy 1 further OTM put (lowest strike)
- Sell 1 OTM call (higher strike)
- Buy 1 further OTM call (highest strike)
Risk/Reward Profile
| Max Profit | Net premium received |
| Max Loss | Width of spread - Premium received |
| Breakevens | Short strikes ± premium received |
Example
XYZ is trading at $100. You set up an iron condor:
- Buy $90 put for $0.50
- Sell $95 put for $1.50
- Sell $105 call for $1.50
- Buy $110 call for $0.50
Net Credit: $1.50 + $1.50 - $0.50 - $0.50 = $2.00
- Max Profit: $200 (if XYZ stays between $95-$105)
- Max Loss: $5 - $2 = $3/share = $300
- Breakevens: $93 and $107
When to Use
- You expect the stock to stay range-bound
- Implied volatility is high (premiums are rich)
- You want defined risk on both sides
Pros and Cons
| Pros | Cons |
|---|---|
| Defined, limited risk | Limited profit potential |
| Benefits from time decay | Requires stock to stay in range |
| Benefits from volatility decrease | Can lose on sudden moves |