⚠️ Options involve significant risk and are not suitable for all investors. Before trading options, read the OCC Characteristics and Risks of Standardized Options. Educational only; not investment advice. Examples ignore commissions, taxes, and early assignment.

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Iron Condor

Sell an out-of-the-money put spread and an out-of-the-money call spread. You profit if the stock stays in a range.

New to this? An iron condor uses four options: a put spread below the price and a call spread above it. You collect money up front and hope the stock stays between the short strikes. Unfamiliar word? See the options glossary.

Payoff at expiration

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When traders use it

You expect low movement / range-bound price and elevated implied volatility.

Formulas (per share; ×100 per contract)

Max profit	Net credit
Max loss	Wider wing width − net credit
Breakeven	Short put − credit, and short call + credit

Key risks

Large sharp moves cause max loss; losses usually exceed the max profit; four legs mean more commissions and assignment risk.

How it works

Four options, same expiration: sell an OTM put and buy a further OTM put (put credit spread), and sell an OTM call and buy a further OTM call (call credit spread). You collect a net credit. If the stock stays between the short strikes, all options expire worthless and you keep the credit. Losses are capped by the long wings.

Worked example HYPOTHETICAL

Hypothetical example only — not real prices or a recommendation. Stock at $100. Buy $85 put ($0.50), sell $90 put ($1.20), sell $110 call ($1.20), buy $115 call ($0.50). Net credit $1.40 ($140). Wing width $5.

Stock price at expiration	P/L (1 contract, excl. fees)
$80	−$360
$88.6	$0
$90	+$140
$100	+$140
$110	+$140
$111.4	$0
$120	−$360

Market outlook: when to use it

Use when: Neutral; expect the stock to stay in a range, ideally when implied volatility is elevated.

Avoid when: Before earnings or big news, or in strongly trending markets.

The Greeks, in plain words

Delta	Near zero at entry; becomes negative if the stock rises toward the calls, positive if it falls toward the puts.
Theta	Positive: you earn as time passes and options decay.
Vega	Negative: rising volatility hurts.
Gamma	Negative: large moves hurt, increasingly near expiration.

Choosing strikes and expiration

Short strikes are often near 0.15–0.20 delta or outside the expected move; wings $5–$10 wide. 30–45 days, aiming for a credit of roughly 1/3 of wing width.

Managing the trade

Take profit around 50% of the credit. If one side is tested, you can close it, roll the untested side closer for more credit, or roll the whole trade out in time. Close by expiration to avoid pin risk; short legs can be assigned early when deep ITM.

Common mistakes

Credits too small for the risk (e.g., $0.30 on a $5 wing).
Holding into expiration week with short strikes tested.
Trading through earnings.

FAQ

Max loss?
Wing width − credit = $5 − $1.40 = $3.60 ($360).

Can both sides lose?
At expiration only one side can be in the money.

Explained simply

When would someone use this?

When you expect a stock to stay in a range until expiration.

The setup, in plain words

Sell a put and buy a lower put; sell a call and buy a higher call. The bought options cap the loss on each side.

Max profit, max loss and breakeven

Max profit: The net credit received.
Max loss: (Width of one spread − net credit) × 100.
Breakeven: Two breakevens: short put strike − credit, and short call strike + credit.

A simple numeric example (hypothetical)

Stock at $100. Sell the $95/$90 put spread and the $105/$110 call spread for a total credit of $1.50 ($150). Stock between $95 and $105 at expiration: keep $150. Breakevens are $93.50 and $106.50. Below $90 or above $110: loss $350.

The main risks, in plain words