What Is Iron Condor?
An iron condor combines a short call spread (sell a call, buy a higher-strike call) with a short put spread (sell a put, buy a lower-strike put), all in the same expiration. The trade collects net premium and profits if the underlying stays between the two short strikes through expiration.
Maximum profit equals the net credit received and occurs when the underlying ends between the inner strikes. Maximum loss equals the width of either spread minus the credit. The position is short volatility — it benefits from theta decay and rising-then-flat IV.
Iron condors are popular when implied volatility is high (rich premiums) and the trader expects the underlying to stay range-bound. They fail when the underlying breaks out of the expected range, especially with a vol expansion. Common adjustments include rolling the threatened side up or down to capture more time premium.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Theta — Time decay — how much an option loses in value per day as expiration approaches.
- Vertical Spread — Two-leg options strategy: long and short of the same type at different strikes, same expiration.