What is an Iron Condor? Definition, Formula, and Example
An iron condor is a four-leg, defined-risk options strategy that profits when the underlying stays between two short strikes through expiration.
Iron Condor: Plain-English Definition
An iron condor is a four-leg options strategy constructed by selling an out-of-the-money put spread and an out-of-the-money call spread at the same expiration on the same underlying. The trader collects a net credit up front, keeps the full credit if the underlying expires between the two short strikes, and caps losses at the width of either wing minus the credit received. It is a short-volatility, range-bound strategy — the position profits from time decay and falling implied volatility, and loses from large directional moves in either direction.
How It's Constructed
Four legs, all same expiration:
1. Sell 1 put at strike K₁ (OTM below spot)
2. Buy 1 put at strike K₀ where K₀ < K₁ (further OTM, the put wing)
3. Sell 1 call at strike K₂ (OTM above spot)
4. Buy 1 call at strike K₃ where K₃ > K₂ (further OTM, the call wing)
Key formulas (wings equal width for simplicity, width = W):
- Max profit = Net credit received
- Max loss = W − Net credit
- Lower breakeven = K₁ − Net credit
- Upper breakeven = K₂ + Net credit
- Profit zone = price stays between K₁ and K₂
Worked Example
SPY trades at $520, 30 days to expiration, IV around 15%. A trader opens:
- Sell 515 put, buy 510 put → put spread
- Sell 525 call, buy 530 call → call spread
- Net credit collected: $1.50 per share = $150 per contract
- Wing width: $5
- Max loss: $5 − $1.50 = $3.50 per share = $350 per contract
- Breakevens: $513.50 and $526.50
If SPY closes at $522 on expiration, all four legs expire at favorable points for the trader — the 515 put and 525 call expire worthless, the long wings also expire worthless, and the trader keeps the full $150. If SPY closes at $532, the 525/530 call spread reaches max loss of $5, netting a $3.50 loss ($350) after the credit.
When Traders Use Iron Condors
Delta-neutral income traders sell iron condors on index ETFs like SPY, QQQ, and IWM when implied volatility is elevated relative to realized volatility — they are effectively short the variance risk premium. The strategy is most attractive when IV rank is above 30 and the trader expects the underlying to chop rather than trend. Many systematic traders open condors at 30-45 DTE, target 50% of max profit as a close signal, and cut losses at 2x credit received.
Limitations and Common Misconceptions
The risk-reward is asymmetric — in the SPY example, a trader risks $350 to make $150, roughly 2.3-to-1 against. Win rate must exceed the implied probability embedded in that ratio (about 70%) just to break even. Iron condors carry heavy negative gamma near expiration — a sudden move through a short strike in the final week can blow through the credit in hours. Commissions compound across four legs on entry and up to four more on exit. Early assignment on the short put is possible around ex-dividend dates for stock condors. And selling wider wings to collect more credit only increases max loss — it does not improve expected value.