An iron condor combines a bear call spread above the market and a bull put spread below it. You collect a credit and profit if the underlying stays between the two short strikes until expiry.
Structure
- Sell an OTM put and buy a further OTM put below it.
- Sell an OTM call and buy a further OTM call above it.
- All four options have the same expiry.
Example
The index is at 20,000. You sell the 19,500 put and buy the 19,300 put, and sell the 20,500 call and buy the 20,700 call, for a total credit of 60 points.
- Maximum profit: 60, if the index ends between 19,500 and 20,500.
- Maximum loss: 200 – 60 = 140 on either side.
- Break-evens: 19,440 and 20,560.
Managing it
Iron condors win often but lose more when they lose. Many traders take profit at around half the credit and adjust or close a side when the price approaches a short strike, rather than waiting for expiry.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.