Iron Condor

Overview

The Iron Condor is a four-legged strategy that allows you to profit if a stock stays within a "profit zone" range. It is a favorite of income traders because it doesn't require the stock to go up—it just requires the stock not to crash or moon.

It is essentially a combination of a Bull Put Spread and a Bear Call Spread, both sold out-of-the-money.

[!IMPORTANT] This is a Credit Spread. You collect money up front. Your goal is for all four options to expire worthless so you can keep the entire credit.

The Setup

An Iron Condor consists of:

1. Outer Put ($K_1$): Long Put (Protection)
2. Inner Put ($K_2$): Short Put (Income)
3. Inner Call ($K_3$): Short Call (Income)
4. Outer Call ($K_4$): Long Call (Protection)

Mechanics of the Profit Zone

The "Profit Zone" is the area between your two inner (short) strikes.

• Side A (Calls): You're betting the stock won't go above $K_3$.
• Side B (Puts): You're betting the stock won't go below $K_2$. As long as the stock stays between those two numbers, you keep the credit.

Payoff and Break-even

Max Profit

The total credit you received when opening the trade.

$$\text{Max Profit} = \text{Net Credit}$$

Max Loss

The width of one spread (assuming both wings are equal) minus the credit collected.

$$\text{Max Loss} = (\text{Strike Width}) - \text{Net Credit}$$

Break-even Points

You have two break-even points:

• Upper BE: $K_3 + \text{Credit}$
• Lower BE: $K_2 - \text{Credit}$

Real-World Example: Earnings IV Crush

The "Volatility Seller" Greeks

Iron Condors are fundamentally a bet on lower volatility and time passing.

1. Delta: The Neutral Position

At entry, an Iron Condor is Delta Neutral. It doesn't care which way the stock moves, as long as it doesn't move too much.

2. Theta: Double Decay

Because you've sold both a call and a put, you are collecting time decay from both sides of the market. This makes Iron Condors exceptionally powerful as expiration approaches.

3. Vega: Short Volatility

You are "Short Vega." If the market panics (IV rises), your Iron Condor will lose value. If the market calms down (IV falls), you win. This is why traders often open Iron Condors when IV is high, hoping for a "volatility crush."

Management: Know When to Fold

Iron Condors have "Negative Gamma," meaning losses can accelerate quickly if the stock tests your strikes. Professional traders rarely wait until expiration. They often close the trade once they've captured 50% of the max profit to avoid late-stage volatility.

Checklist for Entry

• Is the stock in a clear consolidation or "sideways" pattern?
• Is the Implied Volatility (IV) high relative to its history?
• have I checked for upcoming Earnings or Fed announcements that might break the range?

The Iron Condor Margin MathRead more

When you open an Iron Condor, your broker will "lock up" a certain amount of capital (margin). Since the stock cannot be above $K_4$ and below $K_1$ at the same time, the margin is usually just the risk of one side:

$$\text{Required Margin} = (K_4 - K_3) \times 100$$

The credit you receive reduces the actual "buying power" reduction:

$$\text{Buying Power Effect} = (\text{Margin}) - (\text{Credit})$$