{
  "id": "9b2e7b8a-af53-5fcc-b446-b4413b14efc9",
  "slug": "iron-condor",
  "term": "Iron Condor",
  "aliases": [],
  "category": "Derivatives & Options",
  "category_slug": "derivatives-options",
  "difficulty": "intermediate",
  "definition": "An iron condor is a four-legged, range-bound options strategy that sells an out-of-the-money call spread and an out-of-the-money put spread simultaneously on the same underlying and expiration, generating a net credit and creating a defined maximum profit zone in which the underlying must reside at expiration, with limited losses on both upside and downside beyond the short strikes. The strategy profits from stable prices, declining implied volatility, and time decay.",
  "key_takeaways": [
    "The iron condor separates the two short strikes (unlike the iron butterfly which overlaps them at ATM), creating a wider maximum profit range at the cost of lower maximum profit.",
    "Maximum profit = net premium received; Maximum loss = call spread width (or put spread width, whichever is wider) minus net premium received.",
    "The strategy has four break-even points defined by the two short strikes plus or minus the net credit, with maximum profit between the two short strikes.",
    "Iron condors are short vega (hurt by rising implied volatility) and long theta (benefiting from time decay), making them suitable for selling volatility in high-IV environments.",
    "Probability of profit (POP) is the theoretical probability (derived from implied volatility) that the underlying expires between the two break-even points; higher POP iron condors have lower maximum profit but more likely payoffs."
  ],
  "detailed_explanation": "The iron condor is one of the most widely traded premium-selling options strategies among both retail and institutional options traders, having gained particular popularity with the rise of weekly options (which allow frequent implementation) and the educational content produced by retail options trading platforms. The strategy's defining feature is the separation of the two short strikes—placing the short call strike above the current price and the short put strike below the current price—creating a profitable 'corridor' between the two strikes where maximum profit is realized.\n\nThe iron condor is constructed by selling a call spread (selling an OTM call at the lower call strike, buying a further OTM call at the upper call strike) and simultaneously selling a put spread (selling an OTM put at the higher put strike, buying a further OTM put at the lower put strike). The net credit from selling both spreads represents the maximum profit. The call spread provides protection against upside moves: if the underlying rallies above the short call strike, the short call spread begins losing money, but losses are capped when the underlying reaches the long call strike. Similarly, the put spread provides protection against downside moves. The total maximum loss occurs if the underlying moves beyond either set of wings.\n\nThe selection of strikes is the central design decision for an iron condor. Practitioners typically select short strikes at a specific delta (e.g., 16-delta options, which have approximately a 16% probability of expiring in-the-money according to the log-normal model). The 16-delta strike selection implies that both short strikes have a roughly 84% probability of expiring worthless, and the combined probability of the underlying staying within the corridor is approximately 68%—equivalent to one standard deviation of the underlying's price distribution. The width of the wings (distance between short and long strikes) and the premium received for each spread determine the risk-reward ratio.\n\nThe Greeks of an iron condor reveal its sensitivity to market conditions. Delta is near zero at initiation (the short OTM call and put partially offset each other), but the position becomes directionally biased as the underlying moves toward either short strike. Gamma is negative throughout—the short options' negative gamma dominates the long options' positive gamma—creating acceleration in losses as the underlying approaches or passes the short strikes. The magnitude of negative gamma is less than for an iron butterfly (because the short options are OTM), providing slightly more stability before gamma becomes dangerous. Theta is the primary driver of profitability: the iron condor earns daily time decay as long as the underlying remains within the profitable corridor. Vega is negative—rising implied volatility expands the value of all options, with the net effect of increasing the cost to close the position.\n\nRisk management of iron condors involves monitoring and adjusting as market conditions change. A common rule is to close the position when cumulative loss reaches 2x the original credit received (closing when the short spreads appreciate to 3x their initial sale value), limiting losses to predetermined levels. Position sizing—allocating only a small fraction of portfolio capital to any single iron condor, given its defined maximum loss—is the primary capital preservation mechanism. 'Rolling' the tested side (the short strike being approached by the underlying) to a new strike further out-of-the-money, or converting the at-risk spread to a debit spread, are common defensive adjustments.",
  "example": "With the Russell 2000 ETF (IWM) at $185, an options trader sells a 45-day iron condor: sells the IWM 195 call at $1.20, buys the IWM 200 call at $0.60, sells the IWM 175 put at $1.15, and buys the IWM 170 put at $0.65. Net credit = ($1.20 - $0.60) + ($1.15 - $0.65) = $0.60 + $0.50 = $1.10 per share ($110 per contract). Maximum profit = $1.10 (IWM expires between $175 and $195). Maximum loss = $5.00 - $1.10 = $3.90 per share ($390 per contract) if IWM expires above $200 or below $170. Break-evens: $195 + $1.10 = $196.10 (upper) and $175 - $1.10 = $173.90 (lower). As expiration approaches with IWM at $188, the iron condor retains approximately $0.35 of premium, and the trader closes for a $0.75 profit ($75 per contract), representing a 68% return on the maximum risk.",
  "formula": "Max Profit = Net Credit; Max Loss = Spread Width - Net Credit; Upper Break-Even = Short Call + Net Credit; Lower Break-Even = Short Put - Net Credit",
  "formula_latex": null,
  "interactive_type": "calculator",
  "calculator_id": null,
  "related_terms": [
    "binomial-tree-model",
    "delta",
    "delta-neutral",
    "embedded-derivative",
    "gamma",
    "greeks",
    "implied-volatility",
    "in-the-money",
    "iron-butterfly",
    "out-of-the-money",
    "premium",
    "second-order-greeks",
    "standard-deviation",
    "theta",
    "time-decay"
  ],
  "backlinks": [
    "contract-month",
    "credit-default-swap",
    "horizontal-spread",
    "iron-butterfly",
    "mixed-swap",
    "options-chain",
    "out-of-the-money",
    "ratio-spread",
    "spread-option",
    "swap"
  ],
  "cross_references": [
    "delta",
    "gamma",
    "greeks",
    "implied-volatility",
    "in-the-money",
    "iron-butterfly",
    "out-of-the-money",
    "premium",
    "standard-deviation",
    "theta",
    "time-decay",
    "vega",
    "volatility",
    "weekly-options"
  ],
  "tags": [
    "level:intermediate",
    "cat:derivatives-options"
  ],
  "asset_classes": [
    "derivatives"
  ],
  "regulators": [],
  "see_also": [],
  "sources": [],
  "wordcount": 945,
  "checksum": "d3b5d3cd109f9bbe",
  "version": "2026.05.03",
  "license": "CC-BY-4.0",
  "updated_at": "2026-09-07T02:15:24+00:00",
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