Iron Condor
Short put spread + short call spread
What is Iron Condor?
Iron Condor An iron condor is a four-leg defined-risk neutral options strategy that profits when the underlying stays within a specified range through expiration. Structure: sell 1 OTM put, buy 1 further OTM put (lower wing), sell 1 OTM call, buy 1 further OTM call (upper wing). The seller collects credit upfront and keeps it if the underlying remains between the short put and short call strikes. Mechanics: - Sell OTM put + buy further OTM put = bull put credit spread (downside) - Sell OTM call + buy further OTM call = bear call credit spread (upside) - Combined = iron condor The iron condor is mathematically equivalent to two credit spreads on opposite sides of the underlying. The credit collected is the sum of both credit spreads' premiums. The max loss is the wing width (typically the same on both sides) minus the total credit. Worked example: SPY at $540, 45 DTE - Sell 1 SPY $525P at $2.20, buy 1 SPY $520P at $1.20 = $1.00 credit on put side - Sell 1 SPY $555C at $1.80, buy 1 SPY $560C at $0.80 = $1.00 credit on call side - Total credit: $2.00 ($200 per contract) - Max profit: $200 if SPY stays between $525 and $555 at expiration - Max loss: $5 wing width − $2 credit = $3 ($300) on either side - POP at entry: ~70% with 16-delta short strikes - Capital required: $300 per contract (Reg-T or portfolio margin) The iron condor is one of the most popular retail premium-selling strategies because it offers: - **Defined risk** — capped max loss vs naked short strangle - **High probability of profit** — 65-75% at 16-delta short strikes - **Capital efficient** — buying power is just the wing width minus credit - **No assignment risk if managed properly** — close before expiration to avoid pin risk When iron condors work best: - Moderate IV environments (IV rank 40-70) - Range-bound or trending-slowly markets - Cash-settled indices (SPX, NDX) to eliminate assignment risk - 30-45 DTE entries closed at 50% max profit or 21 DTE When iron condors fail: - Strong directional moves past either short strike - Vol spikes that expand IV beyond breakevens (vega-negative position) - Earnings or event-driven outsized moves The iron condor has a structural edge: realized volatility on equity indices consistently underperforms implied volatility (the volatility risk premium). Over multi-year samples, systematic iron condor selling has produced positive net P&L despite the negative-vega exposure and capped reward-to-risk. The key is disciplined position sizing and management — single max losses can wipe out months of premium.
Complete Definition
An iron condor is a four-leg defined-risk neutral options strategy that profits when the underlying stays within a specified range through expiration. Structure: sell 1 OTM put, buy 1 further OTM put (lower wing), sell 1 OTM call, buy 1 further OTM call (upper wing). The seller collects credit upfront and keeps it if the underlying remains between the short put and short call strikes. Mechanics: - Sell OTM put + buy further OTM put = bull put credit spread (downside) - Sell OTM call + buy further OTM call = bear call credit spread (upside) - Combined = iron condor The iron condor is mathematically equivalent to two credit spreads on opposite sides of the underlying. The credit collected is the sum of both credit spreads' premiums. The max loss is the wing width (typically the same on both sides) minus the total credit. Worked example: SPY at $540, 45 DTE - Sell 1 SPY $525P at $2.20, buy 1 SPY $520P at $1.20 = $1.00 credit on put side - Sell 1 SPY $555C at $1.80, buy 1 SPY $560C at $0.80 = $1.00 credit on call side - Total credit: $2.00 ($200 per contract) - Max profit: $200 if SPY stays between $525 and $555 at expiration - Max loss: $5 wing width − $2 credit = $3 ($300) on either side - POP at entry: ~70% with 16-delta short strikes - Capital required: $300 per contract (Reg-T or portfolio margin) The iron condor is one of the most popular retail premium-selling strategies because it offers: - **Defined risk** — capped max loss vs naked short strangle - **High probability of profit** — 65-75% at 16-delta short strikes - **Capital efficient** — buying power is just the wing width minus credit - **No assignment risk if managed properly** — close before expiration to avoid pin risk When iron condors work best: - Moderate IV environments (IV rank 40-70) - Range-bound or trending-slowly markets - Cash-settled indices (SPX, NDX) to eliminate assignment risk - 30-45 DTE entries closed at 50% max profit or 21 DTE When iron condors fail: - Strong directional moves past either short strike - Vol spikes that expand IV beyond breakevens (vega-negative position) - Earnings or event-driven outsized moves The iron condor has a structural edge: realized volatility on equity indices consistently underperforms implied volatility (the volatility risk premium). Over multi-year samples, systematic iron condor selling has produced positive net P&L despite the negative-vega exposure and capped reward-to-risk. The key is disciplined position sizing and management — single max losses can wipe out months of premium.
Example
SPX at 5,800, 45 DTE. Sell 5,650/5,600P, 5,950/6,000C iron condor for $13.50 total credit ($1,350 per contract). SPX oscillates between 5,720 and 5,880 over 30 days. Close at 21 DTE for $6.50 debit. Net: +$700 per contract on $3,650 of locked capital (~19% return on capital, 70-day hold).
Related Terms
Frequently Asked Questions
What is an iron condor?
An iron condor is a four-leg neutral options strategy combining a bull put credit spread (downside) with a bear call credit spread (upside). The seller collects premium and profits if the underlying stays between the short strikes through expiration. Max loss is capped at wing width minus credit.
What's the typical iron condor win rate?
At 16-delta short strikes with 30-45 DTE entries and 50% max-profit close, iron condors typically win 65-75% of the time. Holding to expiration drops the realized win rate to ~62% because gamma risk in the final two weeks turns winning positions into losers more often.
How much capital does an iron condor require?
Capital is the wing width minus the credit received. For a 5-wide SPY condor paying $2 credit, the required capital is $300 per contract. Iron condors are 15-20x more capital-efficient than equivalent short strangles, making them the preferred neutral premium-selling structure for most retail accounts.
Want to Learn More?
Explore our educational resources and analytics tools to deepen your understanding.