Iron Condor Strategy
Profit from sideways markets with defined risk. The Iron Condor is one of the most popular premium-selling strategies for advanced traders.
What is an Iron Condor?
An Iron Condor combines a Bull Put Spread (below) with a Bear Call Spread (above). You profit when the stock stays between your short strikes.
The 4 Legs of an Iron Condor
| Position | Strike | Action | Purpose | Premium |
|---|---|---|---|---|
| Long Put (Lower Protection) | €165 | Buy | Limits downside loss | -€0.80 |
| Short Put (Lower Spread) | €170 | Sell | Generates premium | +€1.50 |
| Short Call (Upper Spread) | €180 | Sell | Generates premium | +€1.30 |
| Long Call (Upper Protection) | €185 | Buy | Limits upside loss | -€0.50 |
| Net Credit Received | +€1.50 | |||
Key Metrics
Key Formulas
Max Profit = Credit Received
Max Loss = Spread Width - Credit
Break-even = Short Strikes ± Credit
Possible Scenarios
Ideal Scenario: Stock Stays in Range
All options expire worthless. You keep the entire €150 premium.
Scenario 2: Stock Tests Short Put
Put spread loses €200, but you keep €150 premium. Net: -€50.
Scenario 3: Stock Falls Sharply
Put spread reaches full loss (€500), minus premium received (€150) = -€350.
Scenario 4: Stock Rises Sharply
Call spread reaches full loss (€500), minus premium received (€150) = -€350.
When to Trade - Checklist
Before the Trade
- ☐IV Rank > 30% (ideally > 50%)
- ☐No earnings during duration
- ☐30-45 days to expiration
- ☐Neutral outlook on underlying
- ☐Liquid options (OI > 500)
Strike Selection
- ☐Short strikes at ~16 Delta (1 standard deviation)
- ☐Equal spread widths (e.g., both €5)
- ☐Premium > 1/3 of spread width
During the Trade
- ☐Close at 50% profit
- ☐Set stop-loss at 200% of credit received
- ☐Daily check: Price vs. short strikes
- ☐Adjust when stock reaches short strike
Adjusting Your Position
What to do when the stock moves? Here are your options.
Situation
Stock Moving Toward Short Put
Action
Roll Down Call Side
How
Close current call spread and open new one with lower strikes. This brings additional premium and shifts break-even.
Risk
You reduce the profit range to the upside.
Situation
Stock Moving Toward Short Call
Action
Roll Up Put Side
How
Close current put spread and open new one with higher strikes.
Risk
You reduce the profit range to the downside.
Situation
Stock Breaks Through One Side
Action
Close Losing Side
How
Close the losing spread and let the profitable one run. Or close everything for defined loss.
Risk
Realize loss but don't maximize it.
Situation
High IV Before Expiration
Action
Close Early at 50% Profit
How
When you reach 50% of max profit, close the position. This saves gamma risk near expiration.
Risk
Less profit but better win rate and risk-reward.
Pros and Cons
Advantages
- +Defined risk - You know your maximum loss
- +High probability of profit (~70% at 16 Delta)
- +Theta works for you - Time is your friend
- +Benefits from IV crush after entry
- +No directional decision needed
Disadvantages
- -Limited profit vs. larger potential loss
- -4 legs = Higher commissions
- -More complex to manage than simple strategies
- -Large loss if market moves significantly
- -Requires active management
Frequently Asked Questions
When should I trade an Iron Condor?
Iron Condor works best with: 1) High implied volatility (IV Rank > 30%) since you sell expensive premium, 2) Expected sideways movement or range-bound market, 3) No upcoming earnings or major events, 4) Stable underlyings like index ETFs (SPY, QQQ). Avoid Iron Condors in low IV or strong trends.
What is the difference between Iron Condor and Strangle?
A Short Strangle (only Short Put + Short Call) has unlimited risk. The Iron Condor adds long options as "wings" that cap risk. You pay for these protective options, but your max loss is defined. Iron Condor = Defined risk. Short Strangle = Undefined risk. For most traders, Iron Condor is safer.
How do I choose the right spread width?
Spread width determines your maximum risk: Narrow spreads (€2-3): Lower risk but less premium. Medium spreads (€5): Good balance (most popular). Wide spreads (€10+): More premium but higher risk. Rule of thumb: Premium received should be at least 1/3 of spread width. For €5 spreads, at least ~€1.65 credit.
Should I trade symmetric or asymmetric Iron Condors?
Symmetric: Equal distances on both sides. Neutral. Standard approach. Asymmetric: One side closer to price. Use this when you have a slight directional bias. Example: Slightly bullish = Put side closer, more premium from puts. For beginners: Start symmetric, experiment with asymmetry later.
What happens with assignment?
With an Iron Condor, early assignment is rare but possible. If short put is assigned: You buy 100 shares at short put strike. Your long put still protects you. If short call is assigned: You must deliver 100 shares (short position). Your long call limits loss. In both cases, your risk remains defined by the long options.