The iron condor is one of the most popular options strategies for traders who want to make money when stocks do not move much. It sounds fancy, but it is actually just two credit spreads put together. Let us break it down.
What is an Iron Condor?
An iron condor is an options trade that makes money when a stock stays inside a range. You set up a "ceiling" and a "floor" price, and as long as the stock stays between them, you profit.
Simple version: You are betting that the stock will not move too much in either direction. If you are right, you keep the money you collected when you opened the trade.
How It Works
An iron condor has four options (called "legs"):
- Sell a put below the current stock price
- Buy a put even lower (for protection)
- Sell a call above the current stock price
- Buy a call even higher (for protection)
The two puts make a put credit spread. The two calls make a call credit spread. Together, they form an iron condor.
Example: SPY Iron Condor
SPY is trading at $450. You think it will stay between $440 and $460 for the next two weeks.
- Sell the $440 put for $1.50
- Buy the $435 put for $0.75
- Sell the $460 call for $1.50
- Buy the $465 call for $0.75
Total credit: $1.50 + $1.50 minus $0.75 minus $0.75 = $1.50 ($150 per contract)
If SPY stays between $440 and $460, all options expire worthless and you keep the $150.
Maximum Profit and Loss
Maximum Profit
Your max profit is the credit you received when you opened the trade. In our example, that is $150 per contract.
Maximum Loss
Your max loss is the width of one spread minus the credit received. In our example:
- Spread width: $5 ($440 to $435 or $460 to $465)
- Credit received: $1.50
- Max loss: $5 minus $1.50 = $3.50 ($350 per contract)
When to Use an Iron Condor
- You think the stock will stay in a range (low volatility expected)
- After a big move, when you expect things to calm down
- On indexes like SPY or QQQ that tend to move slowly
- When implied volatility is high (you collect more premium)
When NOT to Use an Iron Condor
- Before big events like earnings or Fed meetings
- On stocks that move a lot (high beta stocks)
- When you have a strong opinion on direction
- When implied volatility is already low
Tips for Trading Iron Condors
- Pick the right width: Wider wings mean less risk but less profit. Start with $5 wide spreads.
- Choose the right expiration: 30 to 45 days out is the sweet spot for time decay.
- Set your profit target: Many traders close at 50% of max profit instead of waiting until expiration.
- Have a stop loss: Close the trade if your loss reaches 2x the credit received.
- Track your trades: Keep records to see which setups work best for you.
Pro tip: Iron condors work best on boring, slow moving stocks and indexes. Avoid using them on stocks that could have big news or surprise moves.
Iron Condor vs Credit Spread
A credit spread is a directional bet (bullish or bearish). An iron condor is a neutral bet (you want the stock to stay still). Iron condors collect more premium but have risk on both sides.
Track Your Iron Condors
Pro Trader Dashboard automatically tracks all your options trades, including iron condors. See your win rate, average profit, and which stocks work best for you.
Summary
Iron condors are a great strategy when you expect low volatility. You collect premium upfront and profit when the stock stays in a range. Just remember to manage your risk and close early if the trade goes against you.
Want to learn more? Check out our guide on credit spreads or options vs stocks.