Iron Condor

A neutral options strategy combining an out-of-the-money bull put spread and an out-of-the-money bear call spread, designed to profit from low volatility and a range-bound underlying.

The iron condor sells a put spread below the current price (bull put spread: sell a higher-strike put, buy a lower-strike put) and a call spread above the current price (bear call spread: sell a lower-strike call, buy a higher-strike call). The result is a four-leg position with a defined maximum profit (the net premium received) and a defined maximum loss (the width of the spreads minus the premium collected).

The ideal scenario for an iron condor is that the underlying stays within the range between the short strikes at expiration — both options expire worthless and the trader keeps the entire premium. The breakeven points are the short call strike plus the premium received (above) and the short put strike minus the premium received (below). If the underlying moves outside these breakevens, the position incurs a loss capped at the maximum defined risk.

Iron condors are most appropriate when IV is elevated (so premium collected is large) and when the trader expects the underlying to remain range-bound. Many premium sellers use them around earnings when IV is high but they expect a muted stock reaction. The defined maximum loss is what distinguishes them from naked options selling, making them appropriate for accounts that want defined-risk, non-directional income strategies.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.