Iron Condors

This lecture introduces the iron condor — a market-neutral strategy created by combining a put credit spread and a call credit spread into a single trade.

What Is an Iron Condor?

An iron condor consists of four options contracts with the same expiration date:

• Sell an out-of-the-money put (bull put spread leg)
• Buy a further out-of-the-money put (protection)
• Sell an out-of-the-money call (bear call spread leg)
• Buy a further out-of-the-money call (protection)

You collect credit on both sides of the trade.

How It Works

• Maximum profit: The total credit received from both spreads. You keep this if the stock stays between the two short strikes at expiration.
• Maximum loss: The width of the wider leg minus the total credit received. Only one side can be challenged at expiration.
• Breakeven points: You have two — one on each side, giving you a wider profitable range than a single credit spread.

Iron Condors vs. Single Credit Spreads

• Iron condors collect more total credit since you're selling premium on both sides
• The extra credit creates wider breakeven points, giving the stock more room to move
• Only one side can lose at expiration — the other always expires worthless
• Iron condors may require less margin per dollar of credit collected
• However, commissions are higher since you're trading four contracts per lot

Managing Iron Condors

• It's common to close iron condors earlier than single spreads to manage risk
• If one side is threatened, you can convert to a single credit spread by closing the unchallenged side
• You can also roll the threatened side further out of the money
• Setting profit targets (e.g., close at 50% of max profit) helps lock in gains

Building a Strategy

• Choose appropriate strike widths and distances from the current price
• Select expiration dates that balance premium collected with time risk
• Track your win rate and average profit/loss to refine your approach
• Scale up lot sizes gradually as your strategy proves profitable

Key Takeaway

Iron condors are a powerful neutral strategy that profits from the stock staying within a range. They combine the best of both credit spreads and are a staple in many income-focused trading portfolios.