Iron Condor
An iron condor is a four-leg options strategy that combines a bull put spread and a bear call spread on the same underlying stock or index, profiting when the price stays within a defined range until expiration.
The iron condor is one of the most popular neutral-to-sideways options strategies among retail and institutional traders alike. It is constructed by simultaneously selling an out-of-the-money put, buying a further OTM put (forming the bull put spread), selling an OTM call, and buying a further OTM call (forming the bear call spread) — all on the same underlying and expiration. The four legs create a 'tent' of profitability: as long as the stock stays between the two short strikes at expiration, the entire net premium collected is kept.
The maximum profit equals the net credit received when the trade is entered. The maximum loss equals the width of one spread (all spreads are the same width in a standard iron condor) minus the credit received, multiplied by 100. For example, if you sell the $95/$90 put spread and the $105/$110 call spread on a $100 stock and collect $2.00 net credit, the max profit is $200 per iron condor and the max loss is ($5 - $2) x 100 = $300 per side. You cannot lose on both sides simultaneously, since the stock can only be above or below the range, not both.
Iron condors are fundamentally short-volatility trades. They profit most when implied volatility is elevated at entry (inflating the premium collected) and declines toward expiration, and when the stock trades in a tight range. Theta decay works in the seller's favor — each passing day erodes the time value of all four legs, with the short strikes losing value faster than the long strikes. The trade is typically entered with 30 to 45 days to expiration to optimize the theta/gamma tradeoff.
Management is critical. Successful iron condor traders set predefined adjustment levels — such as rolling the threatened spread further out or closing the position when it reaches a certain loss threshold. Many practitioners close the trade when 50% of the maximum profit is achieved rather than holding to expiration to avoid gamma risk in the final days.
Index iron condors (using SPX, RUT, or NDX) are particularly popular because index options are cash-settled, avoiding pin risk and early assignment concerns. The large notional value of index contracts also allows for capital efficiency in a smaller number of legs.