The iron condor is one of the most popular income strategies among options traders. It profits when the underlying stays within a defined range, making it ideal for sideways markets. This comprehensive guide will teach you how to use iron condors to generate consistent monthly income.
What is an Iron Condor?
An iron condor is a four-legged options strategy that combines a put credit spread and a call credit spread. You collect premium from both sides and profit when the underlying stays between your short strikes.
The iron condor advantage: You profit in three scenarios - when the stock goes up slightly, stays flat, or goes down slightly. The only way you lose is if the stock makes a big move in either direction.
The Four Legs
- Buy lower put: Defines max loss on downside (protection)
- Sell higher put: Generates premium (short put spread)
- Sell lower call: Generates premium (short call spread)
- Buy higher call: Defines max loss on upside (protection)
How to Set Up an Iron Condor
Example: Iron Condor on SPY
SPY is trading at $480. You expect it to stay between $460 and $500 for the next 30 days.
- Buy $455 put for $1.00
- Sell $460 put for $1.75
- Sell $500 call for $1.50
- Buy $505 call for $0.90
Net credit: $1.75 - $1.00 + $1.50 - $0.90 = $1.35 ($135 per contract)
Maximum risk: $5.00 - $1.35 = $3.65 ($365 per contract)
Breakeven points: $458.65 and $501.35
Return on risk: 37% if SPY stays between $460-$500
Strike Selection for Iron Condors
Choosing the right strikes is critical for iron condor success.
Delta-Based Selection
- Conservative (10-15 delta): Wide wings, higher probability, lower premium
- Moderate (16-20 delta): Good balance of risk and reward
- Aggressive (25-30 delta): Tighter wings, more premium, more risk
Standard Deviation Approach
- 1 standard deviation: ~68% probability of staying within range
- 1.5 standard deviation: ~87% probability
- 2 standard deviation: ~95% probability
Wing Width Considerations
- Narrow wings ($2-3): Less capital required, lower max loss
- Standard wings ($5): Good balance, most liquid
- Wide wings ($10+): More premium but higher max loss
Best Underlyings for Iron Condors
Index ETFs (Recommended)
- SPY: High liquidity, good premium, diversified
- QQQ: Tech-heavy, higher IV, more premium
- IWM: Small caps, highest IV, most premium
- DIA: Dow Jones, lower volatility, conservative
Individual Stocks
Use caution with individual stocks due to earnings and news risk. Stick to mega-caps if you trade single names.
Optimal Timing for Iron Condors
Days to Expiration
- 30-45 DTE: Sweet spot for theta decay and management time
- Weekly: Faster decay but less time to adjust
- 60+ DTE: More premium but slower decay
Market Conditions
- Low VIX (12-18): Narrower condors, less premium
- Normal VIX (18-25): Ideal conditions for iron condors
- High VIX (25+): Wide condors, great premium but more risk
When to Avoid Iron Condors
- Before major Fed meetings or economic data
- During earnings season on individual stocks
- In strong trending markets (up or down)
- When VIX is extremely low (not enough premium)
Managing Iron Condor Positions
Profit Taking
Do not hold iron condors to expiration. Take profits early:
- 50% profit: Close when you have captured half the credit
- 21 DTE rule: Close around 21 days out to avoid gamma risk
- Time-based: Close at 50% profit or 21 DTE, whichever first
Managing Tested Sides
When the underlying approaches one of your short strikes:
Example: Managing a Tested Put Side
SPY drops to $462, testing your $460 short put.
- Option 1: Close the entire condor for a small loss
- Option 2: Roll the put spread down and out for credit
- Option 3: Close the call spread for profit, manage put spread
- Option 4: Convert to a butterfly or other structure
Rolling Strategies
- Roll out: Move to next expiration for more time
- Roll away: Move the tested side further from the money
- Roll out and away: Combine both for best results
- Roll for a credit: Never roll for a debit if possible
Iron Condor Position Sizing
Proper position sizing prevents catastrophic losses:
Position sizing rule: Never risk more than 5% of your account on a single iron condor. Calculate risk as max loss minus credit received. If you have a $50,000 account, max risk per condor is $2,500.
- Start with 1-2% risk while learning
- Scale to 3-5% as you develop consistency
- Spread across multiple expirations and underlyings
- Keep cash available for adjustments
Iron Condor Return Expectations
Realistic expectations for iron condor income:
- Monthly return on capital: 3-8% on margin used
- Win rate: 70-85% with proper strike selection
- Average winner: 40-60% of max profit (taking profits early)
- Average loser: 50-100% of max profit when trades go wrong
Building an Iron Condor Portfolio
Diversification Strategies
- Stagger expirations: Open condors every week or two
- Multiple underlyings: Trade SPY, QQQ, and IWM
- Vary wing widths: Mix conservative and moderate setups
- Different delta targets: Some 10 delta, some 20 delta
The Condor Ladder
Open one iron condor per week, always having 4-5 active positions:
- Week 1: Open 45 DTE condor
- Week 2: Open new 45 DTE condor
- Week 3: Manage week 1 condor, open new one
- Week 4: Close week 1 for profit, continue the ladder
Track Your Iron Condor Performance
Pro Trader Dashboard automatically tracks your iron condor trades. See win rate, average credit, management effectiveness, and identify your most profitable setups.
Common Iron Condor Mistakes
- Trading too big: One bad month wipes out several good months
- No adjustment plan: Hoping the market reverses
- Holding to expiration: Gamma risk increases dramatically
- Ignoring IV: Selling condors in low IV environments
- One-sided positions: All condors in the same underlying
Advanced Iron Condor Techniques
Unbalanced Condors
Make one side wider or closer based on market bias:
- Bullish bias: Wider put spread, tighter call spread
- Bearish bias: Tighter put spread, wider call spread
Iron Butterflies
An iron butterfly is an iron condor with short strikes at the same price. Higher premium but narrower profit zone.
Jade Lizard Combination
Combine an iron condor with a strangle for higher premium on one side.
Summary
Iron condors are an excellent strategy for generating consistent income in sideways markets. Focus on proper strike selection, position sizing, and active management. Start with index ETFs, use 30-45 DTE expirations, and take profits at 50% or 21 DTE. Build a diversified condor portfolio and track your results to continuously improve.
Ready to learn more? Explore credit spread income strategies or discover short strangle income for higher premium approaches.