Plenty of stocks spend weeks going nowhere, bouncing between the same high and low. An iron condor is a way to get paid for that. You sell a call spread above the price and a put spread below it, collect premium on both, and keep it all if the stock stays in between.
How it’s built
Four options on the same stock, all with the same expiration:
- Sell an out-of-the-money call above the current price.
- Buy a call further out to cap your risk if the stock rallies.
- Sell an out-of-the-money put below the current price.
- Buy a put further out to cap your risk if the stock drops.
That’s a bear call spread and a bull put spread combined. You receive a net credit when you open it, and as long as the stock finishes between the two short strikes, all four options expire worthless and the credit is yours.
Max profit, max loss and break-even
| Iron condor | |
|---|---|
| Max profit | The net credit, if the stock finishes between the short strikes |
| Max loss | Width of the wider spread − net credit |
| Upper break-even | Short call strike + net credit |
| Lower break-even | Short put strike − net credit |
Worked example
Microsoft ($MSFT) is at $300 and you expect it to stay range-bound for a month. You sell the $310 call and buy the $320 call, and sell the $290 put and buy the $280 put. Say the whole thing brings in a $3 credit, or $300 per condor. (Actual premiums depend on the stock and how volatile it is.)
- Break-evens: $287 and $313.
- MSFT between $290 and $310 at expiration: you keep the full $300.
- MSFT above $320 or below $280: you lose the maximum, $10 − $3 = $7 a share, or $700.
- In between, you keep part of the credit or take a partial loss.
So you’re risking $700 to make $300, betting that the stock stays inside a $26-wide range. That ratio is typical: condors win often, but each loss costs more than each win pays.
A wider version on Tesla ($TSLA) at $250: sell the $270 call and buy the $280 call, sell the $230 put and buy the $220 put. If Tesla stays between $230 and $270, you keep the credit.
When it makes sense
- The stock is trading sideways without a clear trend.
- You expect calm conditions, with no earnings or big news before expiration.
- You want to sell premium with defined risk on both sides.
What to watch out for
- Small wins, bigger losses. The most you can make is the credit, and the max loss is usually larger. A single bad breakout can wipe out several winning months.
- Breakouts. A sharp move through either short strike can take you to the max loss quickly.
- Assignment. If the stock moves past one of the short strikes, you could be assigned on that leg. See options assignment risk.
Tips
- Pick the range from the chart and the expected move, not from how much premium you want.
- Watch implied volatility. Higher IV means bigger credits, but it also means the market expects bigger moves.
- Close early. Many traders take profits at around half the max credit, and cut the trade if the stock threatens one of the short strikes.
There’s more on the math in how to calculate max loss and max profit on an iron condor, and a comparison with its tighter cousin in iron condor vs iron butterfly.