Iron Condor
Strategy Guide
Step-by-step guide to understand
and trade Iron Condors
Contributors
Kirk Du Plessis Founder & CEO
Ryan Hysmith Chief Market Strategist
Steve Henry Content Writer
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Table of Contents
04 Introduction
04 Outlook
04 Setup
05 Payoff Diagram
06 Entering an Iron Condor
07 Exiting an Iron Condor
07 Time Decay Impact
08 Implied Volatility Impact
08 Adjusting an Iron Condor
12 Rolling an Iron Condor
13 Hedging an Iron Condor
Iron Condor Strategy Guide
Iron Condor
An iron condor is a multi-leg, risk-defined, neutral strategy with
limited profit potential. An iron condor consists of selling an out-of-
the-money bear call credit spread above the stock price and an out-
of-the-money bull put credit spread below the stock price with the
same expiration date.
The strategy looks to take advantage of a drop in volatility, time decay,
and little or no movement from the underlying asset. Iron condors are
essentially a short strangle with long option protection purchased above
and below the short strikes to define risk.
Iron Condor Outlook
Iron condors are market neutral and have no directional bias. An
investor would initiate an iron condor when the expectation is the
stock price will stay range-bound before expiration and implied
volatility will decrease.
Iron Condor Setup
An iron condor is created by selling a bear call credit spread and a
bull put credit spread out-of-the-money with the same expiration
date. The combined credit of the spreads defines the maximum profit
for the trade. The maximum risk is defined by the spread width minus
the credit received.
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Iron Condor Strategy Guide
Investors can sell iron condors at any distance from the stock’s
current price and with any size spread between the short and long
options. The closer the strike prices are to the underlying’s price,
the more credit will be collected, but the higher the probability the
option will finish in-the-money. The wider the spread width between
the short and long options, the more premium will be collected, but
the maximum risk will be higher.
Iron Condor Payoff Diagram
The iron condor gets its name from the payoff diagram, which resembles
a large bird’s body and wings. The profit and loss areas are well defined
with an iron condor. If the price closes between the two short strike
prices at expiration, the full credit is realized as a profit. If the underlying
price is above or below one of the long strike prices at expiration, the
maximum loss will be realized. The break-even points are determined by
the total credit received, above or below the short options.
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Iron Condor Strategy Guide
For example, if an iron condor is opened for a $2.00 credit, the break-
even price will be $2.00 above the short call strike and $2.00 below the
short put strike.
Any time before expiration, there may be opportunities to close the
position for a profit by exiting the full position, exiting one spread, or
buying back only the short options. If the options are purchased for less
money than they were sold, the strategy will be profitable.
Entering an Iron Condor
Iron condors are created by selling-to-open (STO) a credit spread above
and below the current stock price. This involves selling an out-of-the-
money option and buying a further out-of-the-money option.
For example, if a stock is trading at $100, a bull put spread could be
opened by selling a put at the $95 strike price and buying a put at
the $90 strike price. A bear call spread could be opened by selling a
call at the $105 strike price and buying a call at the $110 strike price.
This creates a $10 wide iron condor with $5 wide wings. If the credit
received to enter the trade is $2.00, the max loss would be -$300, and
the max profit potential would be $200.
Buy-to-open: $90 put
Sell-to-open: $95 put
Sell-to-open: $105 call
Buy-to-open: $110 call
The spreads can be any width and any distance from the current stock
price. The closer the strike prices are to the underlying’s price, the more
credit will be collected, but the higher the probability the options will
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Iron Condor Strategy Guide
finish in-the-money. The larger the width of the spread is between the
short option and the long option, the more premium will be collected,
but the maximum risk will be higher. The longer the expiration date is
from the trade’s entry, the more premium will be collected when the
position is opened, but the probability of profit will decline because
there is more time for the underlying security to challenge one of the
short strike prices.
Exiting an Iron Condor
Iron condors look to capitalize on time decay, minimal price movement
in a stock, a drop in volatility, or a combination of all three. If the
underlying stock price stays between the short options, the contracts
will expire worthless, and the credit received will be kept.
Any time before expiration, there may be opportunities to close the
position for a profit by exiting the full position, exiting one spread, or
buying back only the short options. If the options are purchased for less
money than they were sold, the strategy will be profitable.
Purchasing long option protection above and below the short strikes
defines the position’s risk. The maximum loss is limited to the spread’s
width minus the credit received. If the underlying stock price is beyond
the long option at expiration, the spread can be exited, and the max
loss will be realized. If one of the short options is in-the-money at
expiration and at risk of assignment, the contracts should be purchased
if assignment is to be avoided.
Time Decay Impact on an Iron Condor
Time decay, or theta, works to the advantage of the iron condor
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Iron Condor Strategy Guide
strategy. Every day the time value of an options contract decreases.
Ideally, the underlying stock experiences minimal movement, and theta
will exponentially lose value as the position approaches expiration.
The decline in value may allow the investor to purchase the options
contracts for less money than initially sold.
Implied Volatility Impact on an Iron
Condor
Iron condors benefit from a decrease in implied volatility. Lower implied
volatility results in a lower option premium. Ideally, when an iron condor
is initiated, implied volatility is higher than it is at exit or expiration.
Future volatility, or vega, is uncertain and unpredictable. Still, it is good
to know how volatility will affect the pricing of the options.
Adjusting an Iron Condor
Iron condors can be adjusted by extending the time horizon of the trade
or by rolling one of the spreads up or down as the price of the underlying
stock moves. Adjusting an iron condor typically brings in more credit,
which increases the maximum profit potential, decreases the maximum
risk, and widens the break-even points. However, the position’s range of
profitability decreases as the iron condor’s width tightens.
Contract size and expiration dates must remain the same to maintain
the original position’s risk profile.
If one side of the iron condor is challenged as the contracts approach
expiration, an investor has two choices to maximize the probability of
success: roll out the position to a later expiration date or roll one of the
credit spreads toward the stock price.
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Iron Condor Strategy Guide
The entire position can be closed and reopened for a later expiration
date. If this results in a credit, the break-even points will be extended by
the premium received.
If one side of the iron condor is challenged, the opposing side could be
rolled in the stock price direction to receive additional credit.
For example, if the stock is trading lower, the $105 / $110 call credit
spread could be closed, and a new spread opened at a lower price.
This will tighten the width of the iron condor, but the additional credit
received will decrease the position’s risk.
Buy-to-close: $105 call
Sell-to-close: $110 call
Sell-to-open: $100 call
Buy-to-open: $105 call
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Iron Condor Strategy Guide
If the adjustment brings in an additional $1.00 of credit, the maximum
profit potential increases by $100 per contract, and the maximum
loss decreases by $100 per contract. The break-even point for the put
spread increases by the amount of credit received.
Conversely, if the stock is trading higher, the $95 / $90 put credit
spread could be closed, and a new spread opened at a higher price.
This will tighten the width of the iron condor, but the additional credit
received will decrease the position’s risk.
Sell-to-close: $90 put
Buy-to-close: $95 put
Buy-to-open: $95 put
Sell-to-open: $100 put
If the adjustment brings in an additional $1.00 of credit, the maximum
profit potential increases by $100 per contract, and the maximum
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Iron Condor Strategy Guide
loss decreases by $100 per contract. The break-even point for the call
spread increases by the amount of credit received.
If the underlying stock’s price has moved substantially, an iron condor
can be converted into an iron butterfly by closing one of the spreads
and centering the short strikes at the same price. An iron condor
adjusted to an iron butterfly will have the most profit potential and least
amount of risk, but the position’s range of profitability ($101 - $109) is
smaller than an iron condor.
Sell-to-close: $90 put
Buy-to-close: $95 put
Buy-to-open: $100 put
Sell-to-open: $105 put
If the adjustment brings in an additional $2.00 of credit, the maximum
profit potential increases by $200 per contract, and the maximum
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Iron Condor Strategy Guide
loss decreases by $200 per contract. The break-even point for the
unadjusted spread will increase by the amount of credit received.
Rolling an Iron Condor
Iron condors can be rolled out to a future expiration date to maximize
the trade’s potential profit. Time decay benefits options sellers. If
expiration is approaching and the position is not profitable, the original
iron condor position may be purchased and reopened for a future
expiration date. This may result in a credit and will extend the trade’s
time duration and widen the break-even points.
For example, if the original iron condor has a $105 / $110 call spread and
a $95 / $90 put spread with a June expiration date and received $2.00 of
premium, an investor could buy-to-close (BTC) the entire iron condor and
sell-to-open (STO) a new position in July. If this results in a credit of $1.00,
the maximum profit potential increases and the maximum loss decreases
by $100 per contract. The new break-even points will be $92 and $108.
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Iron Condor Strategy Guide
Hedging an Iron Condor
The most efficient way to hedge an iron condor is to roll the unchallenged
spread in the direction of the underlying stock’s price movement.
For example, if the underlying stock price has moved higher and is
challenging the bear call spread, the original bull put spread could be
closed and reopened closer to the current stock price. This will increase
the amount of credit received, and if the price of the stock continues
higher, the bull put spread will remain profitable, while the bear call
spread will lose money.
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