Iron Condor
An iron condor sells an out-of-the-money call spread and put spread to profit when a stock stays in a range. Learn how this defined-risk income trade works.
An iron condor is a four-leg options trade that profits when a stock stays in a range. You sell an out-of-the-money call spread and an out-of-the-money put spread, collecting premium, and keep it as long as the stock drifts between your strikes.
It is the wider, more forgiving cousin of the iron butterfly: the same bet on stillness, but with a broad safe zone instead of a single bullseye. Let me build it up.
A Wide Box to Stay Inside
An iron condor is really two credit spreads working together. On the upside you sell a bear call spread, and on the downside you sell a bull put spread. Both are out of the money, one above the stock and one below.
Together they draw a wide box around the current price. As long as the stock stays inside that box until expiration, all four options expire worthless and you keep the full premium. Because each spread has a bought wing further out, your risk is capped on both sides. You collect less premium than an iron butterfly, but you get far more room to be right.
Watch It Work
Apple is at $200 and you expect it to trade quietly. You build the iron condor:
- Sell the $210 call, buy the $220 call (the upside spread)
- Sell the $190 put, buy the $180 put (the downside spread)
- Net credit collected: say $400
Your spreads are $10 wide, so your max loss is the width minus the credit: $10 minus $4, or $600. Your break-evens are $214 up and $186 down.
Apple stays between $190 and $210. All four options expire worthless. You keep the full $400. The stock never had to sit still, only stay in the box.
Apple grinds up to $205. Still inside the range. Everything expires worthless and you keep the whole credit. This forgiving zone is the iron condor's charm.
Apple spikes to $225. It blew past your call spread. You take the max loss of $600, but the $220 call you bought caps it there, no matter how high Apple goes.
When to Use It
An iron condor fits a calm, range-bound view with low or falling volatility. It profits from time decay and from the stock going nowhere in particular, which makes it a staple income trade.
The trade-off versus an iron butterfly is credit for room. The butterfly sells at the money for a fat premium but a tiny profit zone. The condor sells out of the money for a smaller premium but a much wider zone. Many premium sellers favor the condor precisely because it does not require the stock to pin one exact price. It is also the defined-risk upgrade to a naked short strangle: same range bet, but with protective wings that cap the risk.
- An iron condor sells an out-of-the-money call spread and put spread.
- It profits when the stock stays in a range.
- Both max profit (the credit) and max loss are defined.
- It trades a smaller credit for a wider profit zone than an iron butterfly.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What does an iron condor bet on?
It profits when the stock stays boxed between the spreads, letting all four options expire worthless.
How does an iron condor differ from an iron butterfly?
The condor sells OTM strikes, trading a smaller credit for a much wider range than the at-the-money butterfly.
What caps the loss on an iron condor?
Each spread includes a bought option further out, which defines the max loss no matter how far the stock runs.
Bottom Line
An iron condor pays you for a stock that goes nowhere in particular. Sell a call spread above and a put spread below, and keep the premium as long as the price stays inside the box. Its wide safe zone makes it one of the most popular defined-risk income trades.
You collect less than an iron butterfly, but you get room to breathe. When you expect calm and want a boxed-in bet with a known worst case, the iron condor is the workhorse.
Keep going: the narrower, richer cousin is the iron butterfly, the naked version is the short strangle, and the pieces are the bull put spread and bear call spread.