What is an iron condor?

Iron Condor is a market neutral strategy that allows you to profit when the underlying price moves sideways. Iron Condors usually have a limited risk and a high probability of success.

The Iron Condor is a combination of a bull put spread and a bear call spread. The basic construction is:

  • Sell 1 OTM Put
  • Buy 1 OTM Put (Lower Strike)
  • Sell 1 OTM Call
  • Buy 1 OTM Call (Higher Strike)

All options expire at the same month. The distance is usually the same between the short and the long legs of the calls and the puts.

There are few variations of iron condors, here is one of them:

Trade Iron Condors Like Never Before

2 Replies to “What is an iron condor?”

  1. An Iron Condor is a non directional strategy that is designed to earn a profit when the underlying security is perceived to have little or no volatility. The graph looks like this. As you can see, the upside and downside are limited and under no circumstances can the strategy go out of control until you leg-in or leg-out yourself. On a vanilla strategy level basis, it is not recommended you do that.

    When to use this strategy?
    This strategy is used when the investor is expected little volatility in the price of the underlying security in the short term.

    How to build this strategy?
    This strategy has four legs:
    Leg 1 – Sell 1 OTM Put
    Leg 2 – Buy 1 OTM Put with even lower Strike Price
    Leg 3 – Sell 1 OTM Call
    Leg 4 – Buy 1 OTM Call with even higher Strike Price

    Credit Spread/Debit Spread
    This is a Credit Spread Strategy.

    Profit Potential
    This strategy has limited profit potential.
    The maximum gain is limited to the net premium received by the investor while entering the trade.

    When is this strategy profitable?
    The investor earns maximum profit when the price of the underlying security at expiry is between the strike price of the call and the put options that are sold.

    Risk
    As mentioned above in my answer, the investor faces limited risk in this strategy.
    Although the risk is limited, the maximum loss that an investor faces is greater than the maximum profit that the investor can earn in this strategy. Make sure you don’t leg-in or leg-out if you are looking for limited risk and certainty. You can attempt to if you’re a professional trader.

    When is this strategy unprofitable?
    The investor bears maximum loss when the price of underlying security is either greater than the strike price of the call option purchased, or less than the strike price of the put option purchased.

    This strategy is very common among retail traders in USA. The options strategies trend is yet to catch on in India. Currently people mostly trade directional calls or puts paying little or no attention to strategies.

    Creating a calculator for options strategies is our initiative to encourage traders to approach markets in a more systematic manner.

    I recommend you use our Iron Condor Calculator for further analysis & custom simulations.

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