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The Iron Condor Strategy

The Iron Condor strategy sounds more complex than it is. While the name makes for impressive discussion at a dinner party, in reality, the Iron Condor strategy is nothing more than a short call vertical spread combined with a short put vertical spread. Usually, the width between the short and long options are the same for both the put spread and the call spread.

This strategy has some interesting characteristics to it. For one thing, it is a fairly neutral strategy in the sense that it has the best chance of making money if the stock, ETF or index goes nowhere. Second, for most brokers, this strategy offers a benefit of not requiring that margin be held for both spreads. Since the underlying can only be fully ITM on either the call spread or the put spread, only one side of the spread is held in margin.

Iron Condor Spread
In the above example, I've established an Iron Condor position by selling the 25/23 call spread and simultaneously selling the 19/17 put spread. Each side is a $2 wide spread. If on expiration day the price is between the short $19 put and the short $23 call, I keep the entire credit I initially received. If on expiration, the price is between the $25 and $23 call spread or between the $19 and $17 put spread, I may experience a partial loss. And, if on expiration the price is either above $25 or below $17, I will experience the maximum loss.

It may appear from this chart that this trade has a low probability of succeeding. However, over time, this underlying has shown a tenancy to move within a range. So it may move up through my short strike, but will also likely move back down into my range of profit.


I like to use this strategy when I discover a stock, ETF or index that is trading within a range. This is specially true if I find one that is exhibiting an implied volatility that is higher than usual. This can happen if the market in general is showing a higher volatility. It can also happen with stocks as they approach an earnings announcement. I try to stay away from these events though.

Overall, this is considered a neutral strategy as it assumes that the underlying will be within the range of profit on expiration. However, this strategy can also be made slightly bearish or bullish using a couple of different techniques.

Typically when an Iron Condor is entered, the short strikes are selected to be roughly equidistant from the current price. This will result in a position that has a net delta of roughly 0. However, if I was slightly bullish, I might select my short put strike to be closer to the current price and my short call strike to be farther from my current price. The result will be a net position delta that is positive. A similar approach can be taken to create a slightly bearish position.

The second and slightly more exotic way to add a bearish or bullish bias is to create an unbalanced or skewed position. In this case, I may enter a position where the short call spread is only 1 strike wide while the short put spread is 2 strikes wide. This adds more downside risk but offers a situation where if the underlying really takes off (to the up side), the worst that can happen is I may break even or lose a little bit. I won't talk too much about this here since this is a more complex approach.

Trade Entry

Selecting the right stock

Additional Iron Condor Links

Trade Tutorials
Iron Condor (SPY) - Textbook trade
Iron Condor (DIA) - Trade management
Iron Condor (DIA) - Failed trade with lessons

Iron Condor Overview
Iron Condor Entry
Iron Condor Trade Management

I prefer to use highly liquid ETFs or Index options as opposed to stocks. There are several reasons for that. Since this is a neutral strategy, I don't want to be surprised by any kind of corporate events that could suddenly cause my trade to become a loser. Remember the goal is for the price to be nearly unchanged by expiration.

I will pick from an ETF that is highly liquid (volume > 1M/day) and the options are as well. I like to see open interest in strikes I'm considering to be more than 1000. This results in good fills in and out.

Timing the entry

Timing isn't as critical for an Iron Condor trade. However, I like to try to find a point where the underlying is trading roughly between the high and low of the range.

Selecting the right options

I mentioned earlier that one of my criteria for selection of the underlying is that the options I'm considering have a high open interest. Liquidity is important because it can improve the fill prices I get on the spread. Illiquid options result in poor fill prices (i.e. I give up too much of my edge to the market makers).

I also try to select options that still have 20-40 days until expiration. This is where most of the time decay will happen. Once I get inside 20 days, the potential credit I can receive isn't worth the risk. With too much time, there is more chance the trend could change or other event could happen that could turn my trade into a loser.

When setting up the trade, I will choose my short strike prices to be equidistant from the current price. I have two strategies I use when selecting strike prices for the Iron Condor.

The first strategy is more aggressive. It has a higher profitability but also a lower chance of landing between the two short strikes. This is because the short strikes are closer together. For the aggressive approach, I prefer to sell a short strike with a delta of around .30-35 on each side. This strategy offers a chance of success of somewhere between 40 and 50% yet the reward/risk is about 1:1. I'll talk more about this later.

The second strategy is less aggressive but has a lower reward/risk and a higher probability of success. In this case, I will sell short strikes with deltas around .15-.20. With this approach, the reward/risk is usually about 1:3 but my success rate is typically much higher. I'll discuss this variation at a future time.

One other part of the selection process for the Iron Condor is determining the width of the spread. With many of the ETF options, the strikes come in $1 increments. With these, I usually will select a $2 wide spread for each side. With larger strike increments, I'll usually go with 1 strike spreads. These will usually be $2.50 or $5 spreads. The Russell 2000 has $10 strike increments. Be very careful trading these. Beginners should use the IWM, which is the ETF for the Russell 2000 and trades at 1/10 the price with $1 strike increments. Mistakes are a lot less costly with these.

Continue to Iron Condor - page 2

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