Iron Condor Strategy
A four-leg neutral strategy that profits when the stock stays within a range.
Net credit received
Width of wider spread - net credit
Two breakevens: short put - credit AND short call + credit
neutral
📖 What is the Iron Condor?
An iron condor combines a bull put spread and bear call spread on the same underlying and expiration. You collect premium and profit if the stock stays between the two short strikes. It's popular for income generation in range-bound markets and benefits from time decay and volatility contraction.
🔧 How to Set Up
BUY PUT @ Lowest strike (far OTM)
Buy far OTM put for protection
SELL PUT @ Lower-middle strike (OTM)
Sell OTM put
SELL CALL @ Upper-middle strike (OTM)
Sell OTM call
BUY CALL @ Highest strike (far OTM)
Buy far OTM call for protection
💡 Example Trade
Underlying: SPY @ $450
Buy 425p, Sell 430p, Sell 470c, Buy 475c for $1.50 credit
$150 (credit received × 100)
$350 ($5 spread - $1.50 credit)
$428.50 and $471.50
📊 Greeks Profile
Near zero initially. Neutral position.
Negative. Large moves hurt the position.
Positive. Time decay works in your favor.
Negative. Falling IV helps your position.
❓ Frequently Asked Questions
What's a good risk/reward for iron condors?
Many traders target 1:3 or better (risk $3 to make $1) with 70-80% probability of profit. The high probability offsets the unfavorable risk/reward.
How do I adjust an iron condor that's being tested?
Common adjustments include rolling the untested side closer for more credit, rolling the whole position out in time, or closing the tested side to reduce risk.
Pros & Cons
- ✓Profits from time decay and IV contraction
- ✓High probability of profit (wide range to stay within)
- ✓Defined and limited risk
- ✓Can generate consistent income in calm markets
- ✗Limited profit potential
- ✗Large moves can cause full loss
- ✗Requires management if tested
- ✗Profit/risk ratio often unfavorable
Ideal Conditions
- →Expecting range-bound price action
- →High IV (expensive options to sell)
- →No major catalyst expected during trade
- →Want to profit from time decay
💡 Pro Tips
- Enter when IV rank is elevated (>30%)
- Use 30-45 DTE for optimal theta decay
- Close at 50% profit to avoid gamma risk near expiration
- Adjust or close if price tests one of the short strikes