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IRON CONDOR

Core Concept: Sell both a put spread and call spread (same expiration) to profit from range-bound stock movement.

Why It Matters​

Iron condors generate income from time decay and volatility contraction when stocks trade sideways. High probability strategy but small profit margins.

When to Use​

✅ Use iron condors when:

  • Stock range-bound (low realized volatility)
  • IV rank >50% (collect high premium)
  • Neutral outlook, no directional bias
  • Want defined risk income strategy

❌ Avoid when:

  • Expecting breakout or breakdown
  • Earnings approaching (IV spike risk)
  • Low IV rank < 25% (poor premium)
  • Trending market (one side tested)

Strategy Mechanics​

Setup: Sell OTM put spread + Sell OTM call spread
Max profit: Total credit collected (if stock stays between short strikes)
Max loss: Width of wider spread - credit
Breakeven: Two points (short put - credit, short call + credit)

Typical structure: Both spreads same width, equidistant from stock price

Trade-offs​

Pros: High win rate (70-80%), non-directional, defined risk, double premium
Cons: Small profit vs risk (1:3 typical), two breakevens to defend, four legs (commissions)

Iron condors combine two vertical_spreads to exploit options_greeks theta from both sides.

Quick Reference​

Standard setup:

ComponentStrike PositionWidth
Buy putFurthest OTMProtection
Sell putBelow stock (0.15-0.20 delta)Income
Sell callAbove stock (0.15-0.20 delta)Income
Buy callFurthest OTMProtection

Sizing guidelines:

  • Spread width: $5-10 typically
  • Credit target: 20-33% of width
  • Distance: 1-2 standard deviations OTM
  • Days to expiration: 45-60 optimal

Greeks profile:

  • Delta: ~0 (neutral)
  • Theta: Large positive (earn daily)
  • Vega: Large negative (profit from IV drop)
  • Gamma: Negative (risk near short strikes)

Examples​

EXAMPLE

Basic iron condor:

Stock: $100 (range $95-105), 45 DTE

Sell: 95 Put for $1.00 (0.16 delta)
Buy: 90 Put for $0.40 (protection)
Sell: 105 Call for $1.10 (0.16 delta)
Buy: 110 Call for $0.50 (protection)

Net credit: $1.20 ($120 per IC)
Max profit: $120
Max loss: $380 ($500 - $120)
Breakevens: $93.80 and $106.20

Outcome 1: Stock stays $96-104

  • All options expire worthless
  • Keep $120 (31% ROI on $380 risk in 45 days)

Outcome 2: Stock rallies to $108

  • Call side ITM, max loss $380
  • Put side profits $60, but overwhelmed by call loss

Managing tested side:

Entry: 100 IC (95/90 put, 105/110 call), 45 DTE, $1.20 credit

Day 20: Stock at $103 (approaching call side)

Option 1: Close early

  • Buy back IC for $2.00 loss ($0.80 loss vs $1.20 credit)
  • Accept $80 loss, avoid max loss

Option 2: Roll call side up

  • Close 105/110 call spread at loss
  • Open 107/112 call spread for credit
  • Widens profit range, extends trade

Option 3: Convert to iron butterfly

  • Close put side at profit
  • Roll call spread closer for credit
  • Reduces risk, needs mean reversion

Volatility crush example:

Before earnings: Stock $100, IV 80%, 45 DTE

Sell IC: 90/85 put, 110/115 call for $3.00 credit (high IV)

After earnings: Stock moves to $105 (tested call side)

  • IV drops to 40%
  • IC now worth $1.50 (50% profit despite adverse move)
  • Vega profit offset directional loss

High IV environments cushion directional risk.

Comparison: Iron condor vs covered call:

Capital: $10,000

Covered call:

  • Buy 100 shares at $100 = $10,000
  • Sell 105 call for $1.50
  • Income: $150/month (~1.5%)
  • Risk: Full downside to $0

Iron condor:

  • 10 ICs at $1.20 credit = $1,200 income
  • Capital at risk: $3,800 (max loss per IC $380 × 10)
  • Income: $1,200 on $3,800 risk (31% potential)
  • Risk: Defined to $2,600 total

ICs offer higher capital efficiency but active management required.

Strike width trade-off:

Narrow spread ($5 width):

  • Credit: $1.00
  • Max loss: $4.00
  • Win rate: 75%
  • Risk/reward: 4:1

Wide spread ($10 width):

  • Credit: $2.50
  • Max loss: $7.50
  • Win rate: 85%
  • Risk/reward: 3:1

Wider spreads = higher win rate but worse risk/reward. ```

References​