What an iron condor actually is
An iron condor is a defined-risk, defined-reward options strategy built from four legs on the same underlying and the same expiration. You sell an out-of-the-money call spread and, at the same time, sell an out-of-the-money put spread, and you collect a net credit for putting the whole thing on. Because every leg shares one stock and one expiration date, the position behaves as a single unit.
“Defined risk” is the phrase that matters. The most you can lose is fixed and known the moment you open the trade, no matter how far the stock runs. That is the whole point of the structure: you trade away unlimited exposure in exchange for a capped, calculable outcome on both sides.
The four legs
The condor is really two credit spreads stacked around the current price. On the upside you build a call spread: sell a call at a lower strike and buy a call at a higher strike. On the downside you build a put spread: sell a put at a higher strike and buy a put at a lower strike. You sell the two strikes closer to the money, and you buy the two strikes further out.
The two long options are what cap the risk. The short call could in theory expose you to an unlimited move higher, so the long call above it stops the bleeding. The short put exposes you to a move lower, so the long put below it does the same. You give up part of your credit to own that protection, and in return your loss can never run away from you.
When it profits: the range and time decay
An iron condor profits when the stock stays between the two short strikes through expiration. It is a neutral, range-bound trade: you are not betting up or down, you are betting on quiet. If price finishes anywhere inside that band, all four options expire worthless and you keep the full credit.
Two forces work in your favor while you wait. The first is time decay: every day that passes, the options you sold lose a little value, and since you are a net seller, that decay flows to you. The second is falling volatility: when the market calms down, option prices shrink, which helps the short options you are trying to buy back cheaper or let expire. A condor is happiest in a sideways, cooling market.
The max profit, max loss, and breakeven math
- Max profit = net credit received (× 100). This is yours if price stays between the two short strikes.
- Max loss = width of one spread − net credit (× 100), when both spreads are the same width.
- Lower breakeven = short put strike − net credit.
- Upper breakeven = short call strike + net credit.
Read those in real money. One contract controls 100 shares, so a credit quoted as $1.50 is $150 per condor, and a spread quoted as $5 wide is $500 of width per side. The width minus the credit is the capital genuinely at risk, and the two breakevens mark the exact prices where the trade shifts from winner to loser.
A worked example
Say the stock trades at $100. You sell the 105 call and buy the 110 call, and you sell the 95 put and buy the 90 put, for a total net credit of $1.50, which is $150. Each spread is $5 wide. If price finishes anywhere between 95 and 105 at expiration, all four legs expire worthless and your max profit is the full $150.
If price blows through one side, your max loss is the width minus the credit: (5.00 − 1.50) × 100 = $350. The two breakevens fall at 93.50 on the downside, which is the short put strike of 95 minus the 1.50 credit, and 106.50 on the upside, which is the short call strike of 105 plus the 1.50 credit. Between those two numbers you are green; outside them you are red.
The risk-reward tradeoff and managing early
Here is the honest tension in the trade. In that example you risk $350 to make $150, so the loss side is more than twice the win side. What makes the condor attractive is probability: the range is wide, so most of the time price finishes inside it and you collect. You win often and you win small, but a handful of tail moves can undo many of those small wins at once.
That math is why so many traders manage early. Rather than hold for the last few dollars and stay exposed to a late move, they close the position once a good chunk of the credit is captured, or roll the tested side when price presses a short strike. Taking a partial profit and moving on keeps the loss side from ever getting the chance to catch up.