The four legs
An iron condor is two credit spreads sold at once, one above the stock and one below. Written out, the four legs are:
- Sell a put below the current price
- Buy a further out put as protection
- Sell a call above the current price
- Buy a further out call as protection
The two sold options generate the income. The two purchased options are insurance, and they are what turn an open-ended risk into a defined one. Every leg shares the same expiration date.
A worked example
A stock trades at $100 and you expect it to stay roughly between $95 and $105 for the next month. You sell the $95 put for $1.40 and buy the $90 put for $0.55, then sell the $105 call for $1.50 and buy the $110 call for $0.60.
The net credit is $1.40 − $0.55 + $1.50 − $0.60, which is $1.75 per share or $175 per condor.
The flat top is the profit zone. Anywhere from $95 to $105 at expiration, all four options expire worthless and you keep every dollar of the credit. Outside the break-evens the position loses, and the wings stop the bleeding at the outer strikes.
The numbers that define it
| Quantity | Formula | This example |
|---|---|---|
| Max profit | Net credit received | $175 |
| Max loss | Width × 100 − credit | $500 − $175 = $325 |
| Upper break-even | Short call + credit per share | $105 + $1.75 = $106.75 |
| Lower break-even | Short put − credit per share | $95 − $1.75 = $93.25 |
| Profit range width | Upper minus lower break-even | $13.50, or 13.5% |
Note the profit range is wider than the strikes suggest. The stock can drift to $106.50 and you still make money, because the credit extends your cushion past the short strike on both sides.
Why the win rate misleads
Iron condors are seductive because they win often. If both short strikes sit around 0.16 delta, the stock stays inside the range roughly 68% of the time, and traders who sell them report long streaks of profitable months.
The payoff ratio tells the other half of the story. This condor risks $325 to make $175, so a single maximum loss erases nearly two winners. Multiply it out: eleven winning months produce $1,925, and two bad months at full loss cost $650, leaving the year clearly profitable. Three or four bad months, which happens when a market trends rather than chops, changes the answer.
When conditions favor it
Two conditions do most of the work in making a condor worthwhile.
Elevated implied volatility. You are a net seller of premium, so you want options to be expensive relative to their own history. Selling condors when implied volatility sits near the low end of its range collects too little to justify the risk. Our implied volatility guide covers how to judge the level.
A range-bound underlying. Condors do poorly on stocks that trend hard in either direction, and they do poorly through earnings, where a gap can jump straight past a short strike overnight. Broad index products are popular precisely because they move less violently than single names and have no earnings dates.
Managing the position
Very few experienced condor traders hold to expiration. Common practice is to close at 50% of maximum profit, which in this example means buying the condor back for about $0.88 and keeping roughly $87. Half the profit for a fraction of the remaining risk and time is usually the better trade, because the final dollars decay slowly while assignment risk near the strikes grows.
When one side is threatened, the standard responses are to close the whole position, roll the threatened side further out, or roll the untested side closer to collect more credit. Every adjustment costs money or adds risk, so decide the rule in advance rather than improvising while a position moves against you. Run any adjustment through the iron condor calculator before placing it.