iron condo

bull call r
trades
spread
DEFINITION

The Iron Condor is a popular cash flow strategy that can be utilized in stagnant to mildly
trending markets to produce monthly income. It is a multi-leg option spread offering limited risk
and a high probability of profit. An iron condor is constructed by simultaneously selling an
out-of-the money bull put spread and an out-of-the money bear call spread of the same
expiration month. Selling both vertical spreads result in a net credit to your account.

S T R AT E G Y

The maximum profit for the iron condor is equal to the net credit received at trade inception
and will be realized as long as the stock remains between the strike price of the short call and
put. When this occurs, all options expire out-of-the money allowing you to keep the net credit.

M AXI M U M PR OF I T = NET CREDIT RECEIVED AT T RA DE ENT RY

Maximum Profit is Achieved When the Stock Price Resides Between the Strike
Price of the Short Call and Put

The maximum loss is equal to the difference in the strikes of the calls (or puts) minus the net
credit received at trade entry. The maximum loss is realized at expiration if the stock is above
the long call strike or below the long put strike.

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 90 put for $150 and buying the January 80 put for $50. The net credit received at entry
would be $200 and represents the maximum profit potential in the trade. If at expiration XYZ

bull call bull c a l l

When this occurs, both call options expire out-of-the-money causing the spread to be was still trading at $100, both the calls and puts would be trading out-of-the money and
worthless. As a result the bull call spread owner loses the net debit paid to enter the trade. expire worthless allowing you to keep the $200 of premium. The maximum loss would be the
distance between the strike prices on the calls or puts minus the net credit. Since you entered
The formula for calculating max loss is displayed below: a $10 spread and received $2 of credit, the maximum loss would be $8 or $800.

spread spre ad
If at expiration XYZ is above $120 or below $80, you would lose the entire $8.
MAX LOSS = DIFFERENCE BETWEEN STRIKES OF CALLS (OR PUTS) – NET CREDIT

Maximum Loss Occurs if the Stock Resides Above the Long Call Strike or Below
the Long Put Strike

The iron condor has both an upper and a lower breakeven.

The breakeven points can be calculated using the following formulas:

U PPER B R EAK EVEN = LO WER ST RIKE CA LL PLUS NET CREDIT

LOWER B R EAK EVEN = HIGHER ST RIKE PUT MINUS NET CREDI T

As long as the stock remains between both breakevens at expiration, the iron condor trader
will incur some type of profit.

FINDING TRADES (QUICK TIP)

EXAMPLE
Suppose stock XYZ was trading at $100 in December and you anticipated it would be
relatively neutral over the next month. You could enter an iron condor by selling the January
110 call for $150 and buying the January 120 call for $50, as well as selling the January
Although each trader has their own preference, the most popular time to enter condors is
probably around four to six weeks to expiration. The primary reason for this time frame is there
is still sufficient extrinsic value in option premiums to make them worth selling. Furthermore, this
is when time decay really starts to kick in, eroding away at option values. If you wait until too
close to expiration, options have little extrinsic value remaining, making it very difficult to enter

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 a condor with a wide enough range for a sufficient credit.

bull call
Which strike prices you utilize will depend on how wide of a range you want versus how
much credit you are willing to accept. Whereas some traders may choose to trade narrow,
lower probability condors by selling close to the money call and put spreads, others prefer to
enter wide, higher probability condors by selling far out-of-the-money call and put spreads.
The former rewards the trader a higher net credit, the latter offers a lower net credit.

spread S I M I L A R S T R AT E G Y

An alternate strategy to the iron condor that also exploits a neutral to range-bound market is
the iron butterfly. It offers a higher potential return on investment, but requires the stock to stay
in a more narrow range.

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