Iron Condor Options Strategy
The Iron Condor is a neutral, range-bound options strategy that involves four different options contracts with the same expiry date. It is designed to profit when the underlying asset stays within a specific price range until expiration.
Structure of the Iron Condor
- Sell 1 Out-of-the-Money Call (higher strike)
- Buy 1 Out-of-the-Money Call (even higher strike)
- Sell 1 Out-of-the-Money Put (lower strike)
- Buy 1 Out-of-the-Money Put (even lower strike)
All four options are of the same underlying and expiration date. The strategy forms two credit spreads — a bear call spread and a bull put spread.
Market Outlook
The Iron Condor strategy is used when the market is expected to remain within a specific range, without significant upward or downward movement.
Example Setup
Assume the index is trading at 17500.
- Sell 18000 Call
- Buy 18100 Call
- Sell 17000 Put
- Buy 16900 Put
This creates a range between 17000 and 18000. The net credit received is the combined premium from selling the call and put minus the premium paid for the protective legs.
Maximum Profit
Occurs when the underlying expires between the short Put strike and the short Call strike.
Max Profit = Net Premium Collected
Maximum Loss
Occurs when the underlying expires beyond either of the breakeven points.
Max Loss = Difference between adjacent strikes - Net Premium Collected
Breakeven Points
- Upper Breakeven = Short Call Strike + Net Premium
- Lower Breakeven = Short Put Strike - Net Premium
Key Characteristics
| Parameter | Description |
|---|---|
| Strategy Type | Neutral |
| Number of Legs | 4 |
| Risk | Limited |
| Reward | Limited |
| Breakeven Points | Two (upper and lower) |
| Profit Range | Between short Put and short Call strike |
| Margin Requirement | Yes (due to short positions) |
| Volatility Impact | Affected by changes in implied volatility |
Payoff Summary
The payoff graph of an Iron Condor resembles a flat line with a peak between the two short strikes and limited downside on both ends. Maximum profit is earned when the underlying remains within the defined short strike range.