Iron Condor

An Iron Condor is a dual Credit Spread option strategy created from four positions: a Long and Short Put Option and a Long and Short Call Option. Most Iron Condor trades are Long Iron Condors constructed by selling two vertical credit Spreads: a Bull Put Spread and a Bear Call Spread.

Iron Condors are non-directional strategies that profit when the Underlying price remains in a range defined by the two Short strikes for both call and put sides. They have defined risk (i.e. a maximum loss) and a maximum theoretical profit also. Iron Condor is most profitable when the Underlying asset or commodity expires between the two call and put Short strike prices. Iron Condors favour a high Volatility market when opened which subsequently declines to lower Volatility towards Expiration, i.e. Vega reduces over the lifetime of the trade.

Only one side of the Iron Condor can be a losing trade. This, combined with their ability to profit irrespective of whether the investor is right or wrong about market direction makes them popular with Options investors, in addition to their relative simplicity compared with other more sophisticated strategies.

Although the risk of Iron Condors is defined, it is important to be aware that if one side (i.e. one of the Bull put or Bear credit Spreads) is allowed to go into the money and remain there until Expiration, the loss incurred will still usually exceed the credit received from both sides.

Some Options traders prefer to enter one side of an Iron Condor and then add the other side later, however, there are others who argue that one should treat the Iron Condor as a complete position and enter both sides simultaneously. A further variation is the unbalanced Iron Condor. This is where there is an uneven number of contracts on either the Put or Call side so the position is weighted towards one side of the market. This would normally be contemplated if the trader has a view about the direction of the market, but wants to hedge their position somewhat (or they believe any expected move may not be a particularly significant and they can still take in credit from both sides).

In addition to Long Iron Condors, it is possible to create a Short Iron Condor where the Long and Short option positions are reversed so the Short side is furthest away from the money (i.e. a call and put Debit Spread). These are less commonly used and when the term 'Iron Condor' is used, it generally refers to the Long variant.



Example

XYZ is currently trading at $45

Put Side
Short 1 x Out Of The Money $40 Strike Put for 1.0 = $100 credit
Long 1 x Out Of The Money $30 Strike Put for 0.5 = ($50) debit

Call Side
Short 1 x Out Of The Money $50 Strike Call for 1.0 = $100 credit
Long 1 x Out Of The Money $60 Strike Call for 0.5 = ($50) debit

Net credit received = $100 (2 x $50)

All options expire with XYZ still trading at $45

Short 1 x $40 Strike Put is worthless = ($0)
Long 1 x $30 Strike Put is worthless = ($0)
Short 1 x $50 Strike Call is worthless = ($0)
Long 1 x $30 Strike Call is worthless = ($0)

The trader keeps the $100 credit received. This is the total amount of profit available.

Options expire with XYZ trading at $25

Short 1 x $40 Strike Put is now worth 15 = ($1500) debit
Long 1 x $30 Strike Put is now worth 5 = $500 credit
Short 1 x $50 Strike Call is worthless = ($0)
Long 1 x $60 Strike Call is worthless = ($0)

The trader incurs a loss of $1000 which is offset by the credit received of $100 to reduce the liability to (-$900). This is the total amount the trader can lose.

Options expire with XYZ trading at $65

Short 1 x $40 Strike Put is worthless = ($0)
Long 1 x $30 Strike Put is worthless = ($0)
Short 1 x $50 Strike Call is now worth 15 = ($1500) debit
Long 1 x $60 Strike Call is now worth 5 = $500 credit

The trader incurs a loss of $1000 which is offset by the credit received of $100 to reduce the liability to (-$900). This is the total amount the trader can lose.