An iron condor is a four-leg options position that sells an out-of-the-money put spread and an out-of-the-money call spread on the same stock and expiry. It collects a net credit, earns its maximum profit if the stock finishes between the two short strikes, and caps the loss with the long options further out, called the wings.
How it works
From the lowest strike to the highest (A < B < C < D), the position is:
- Buy a put at A and sell a put at B: a bull put spread.
- Sell a call at C and buy a call at D: a bear call spread.
Both halves are credit spreads. The stock cannot finish below B and above C at the same time, so only one side can lose at expiry. Values below are per share; one contract covers 100 shares.
| Measure | Formula |
|---|---|
| Max profit | Net credit |
| Max loss | Wider wing width (B − A or D − C) − net credit |
| Lower breakeven | B − net credit |
| Upper breakeven | C + net credit |
The position profits from time passing (positive theta) and from falling implied volatility (negative vega), and it loses when the stock moves sharply toward either short strike (negative gamma). Common practice places the short strikes around 15 to 20 delta with 30 to 45 days to expiry, though these are conventions, not rules.
How to read it
- Short strikes against the expected move. Strikes outside the expected move require a larger-than-priced move to be reached; strikes inside it can be reached by an ordinary move.
- Volatility backdrop. Condors are better paid when implied volatility is high relative to realized volatility, and they suffer when IV rises after entry.
- Market regime. Positive dealer gamma tends to dampen moves, which suits range trades; negative gamma tends to extend them. See gamma exposure and the options wall.
- Events. An earnings report before expiry can gap the stock past either short strike.
- Credit vs width. A wider wing raises the maximum loss more than it raises the credit. Probability of profit and return on risk move in opposite directions.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $100, with 35 days to expiry.
- Buy the $85 put for $0.40; sell the $90 put for $1.10.
- Sell the $110 call for $1.00; buy the $115 call for $0.20.
- Net credit: 1.10 + 1.00 − 0.40 − 0.20 = $1.50, or $150 per condor.
- Max loss: (5 − 1.50) × 100 = $350. Return on risk: 150 ÷ 350 ≈ 43%.
- Breakevens: $88.50 and $111.50.
At expiry, anywhere from $90 to $110 keeps the full $150. At $113 the call spread is worth $3, so the result is 1.50 − 3 = −$1.50, a $150 loss. At $115 or above the loss is the full $350. The payoff is asymmetric: many modest gains, occasionally offset by one larger loss.
Assignment and early exercise
- American-style options. Options on US stocks and ETFs can be exercised at any time, so a short leg can be assigned early, most often when it is deep in the money with little time value left.
- Dividends. A short call in the money is at higher risk of assignment just before the ex-dividend date, when the dividend exceeds its remaining time value.
- Assignment on one leg. If the short put is assigned you hold 100 shares, and the long put still protects below its strike, but you need the buying power and must manage the stock.
- Pin risk. If the stock closes near a short strike at expiry, you may not know whether you will be assigned, and after-hours moves can change the outcome. Closing or rolling before expiry avoids this.
- Cash-settled, European-style index options such as SPX cannot be assigned early; SPY options are American-style.
Limitations and common mistakes
- Four legs mean four bid/ask spreads: fills at the mid price are optimistic.
- Probability of profit comes from a model at today's IV, not a forecast.
- Holding to expiry maximizes gamma risk; many traders close early once most of the credit is earned. Size each position so the max loss is acceptable; see stop-loss and position sizing.
In Clear Tape
Pro members can build an iron condor on any stock in the Options strategies section of the Options page. It starts from shorts near 16 delta, wings about 2.5% of the share price and the expiry closest to 35 days, and every setting can be changed: expiry, short strikes, wing width and short delta. The build shows each leg's quotes, the credit at mid and at natural prices, max profit, max loss, breakevens, chance of profit, return on risk, the short strikes measured in expected moves, and checks such as earnings before expiry or strikes inside the walls. The payoff chart shows expiry plus Today and In N days lines, which assume IV is unchanged. No orders are placed. Data reflects the previous session's close. See pricing.
For educational purposes only. Not investment advice.