The Iron Condor is a neutral income strategy that profits when the price stays inside a set range. It suits traders who expect the market to stay calm rather than pick a direction.
How is it built? (4 legs)
It is made of two opposing Credit Spreads:
- Upper side: sell a near Call + buy a farther Call (protection).
- Lower side: sell a near Put + buy a farther Put (protection).
You collect a net premium when you open, and that is your maximum possible profit.
When do we use it?
In low-volatility markets (IV low to medium), or when you expect the price to stay in a narrow range until expiration. Theta works in your favor more and more as expiration nears.
Example on SPX
Say SPX is at 5000. You sell the 4900 Put and buy the 4880 Put, then sell the 5100 Call and buy the 5120 Call. The net premium is $5 = $500 maximum profit. Maximum loss = wing width (20) − premium (5) = 15 = $1500.
- Maximum profit: the net premium (if the price stays between 4900 and 5100).
- Maximum loss: limited to the wing width minus the premium.
- Breakeven points: the sold strike price ± the net premium.
Managing the trade
A common rule: close when 50% of the premium is captured, or when the price nears one of the short wings. Don't always wait for expiration. Risk management beats greed.
