Iron Condors: Betting on a Range

Sell a range, collect premium

An iron condor sells a strangle to collect money, then buys a cheaper option further out on each side as “wings”. If the stock ends between the two short strikes at expiration, the two options you sold expire worthless and you keep the whole net premium.

Trading probability for payoff

The wider the range, the higher the probability of profit, but the less you collect and the bigger the maximum loss relative to it. There's no free lunch: a high win rate usually comes with a poor payoff.

Taken apart: two credit spreads

Iron condor = a bull put spread below + a bear call spread above. At expiration the stock can only break out on one side at most, so the maximum loss counts just one wing's width.

Key takeaways

• Iron condor = sell the inner put and call + buy the outer put and call, collecting a net premium when you open.
• Maximum gain = net premium; maximum loss = wing width − net premium.
• The wider the range, the higher the probability of profit but the less premium you collect. Probability and payoff always trade off.
• Iron condor = a bull put spread + a bear call spread, so at expiration you can lose on at most one side.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Look at the maximum profit and maximum loss: do they add up to the wing width?
2. Increase “How far the short legs are from the current price” from $10 to $18: how high does the probability of profit go? How low does the credit fall?
3. Change the wing width from $5 to $15: how does the maximum loss change?
4. Switch to “Naked short strangle” to compare: the probability of profit is about the same, but what does the maximum loss become?

Quiz and explanations

1. When does an iron condor make its maximum gain?

Answer: When the stock stays between the two short strikes.Both short legs of the four options expire worthless, and you keep the whole premium.

2. The wings are $5 wide and you collect a $1.5 net premium. What's the maximum loss?

Answer: $3.5.$5 − $1.5 = $3.5. The options bought on the outside cap the loss.

3. Iron condor: buy the 85 put, sell the 90 put, sell the 110 call, buy the 115 call, for a net credit of $1.8. At expiration the stock is $112. What's your P&L per share?

Answer: −$0.2.The short 110 call is $2 in the money and the other three legs expire worthless: $1.8 − $2 = −$0.2 (the upper breakeven is $111.8).

Terms in this lesson

• breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
• bull put spread (Bull Put Spread): Sell a higher-strike put and buy a lower-strike put, collecting cash up front; you keep it all if the stock stays above the higher strike, and the maximum loss is the spread width minus that credit.
• implied volatility (IV) (Implied Volatility (IV)): The volatility backed out of an option's market price, reflecting the market's expectation of future swings; the higher the IV, the pricier the option.
• iron condor (Iron Condor): Sell an inner put and call and buy outer ones as protection; you keep the premium if the stock stays in the range, and the maximum loss is capped.
• net premium (Net Premium): Premium paid on long legs minus premium received on short legs; paying net is a debit, receiving net is a credit.
• probability of profit (Probability of Profit): The estimated chance a position makes money at expiry based on current implied volatility; it's a model estimate, not a guarantee.