An iron condor is a neutral options strategy that simultaneously sells an out-of-the-money call spread and an out-of-the-money put spread on the same underlying, collecting a net credit. The trade profits when the underlying stays between the two short strikes through expiration. Maximum profit is the credit received; maximum loss is capped at the wing width minus that credit. Iron condors are a defined-risk, non-directional structure designed for range-bound markets with elevated implied volatility.

The Four Legs of an Iron Condor

An iron condor is built from four option positions, all on the same underlying and expiration. Each leg has a specific role in defining the trade's risk and reward.

• Long OTM put (lowest strike): This is the floor of the put spread. It caps the downside loss if the stock falls sharply. Without it, the short put would carry unlimited downside risk. This leg costs premium and reduces the net credit.
• Short slightly-OTM put (second-lowest strike): This is the primary income-generating leg on the downside. You collect premium by selling this put and take on the obligation to buy shares at the strike if the stock falls through it. The short put is the position you need the stock to stay above.
• Short slightly-OTM call (second-highest strike): The mirror of the short put on the upside. You sell this call and collect premium, obligating you to sell shares at the strike if the stock rises through it. You need the stock to stay below this level at expiration.
• Long OTM call (highest strike): The cap on the upside loss. Just as the long put protects against a crash, this long call protects against a sharp rally beyond your short call strike. It also costs premium and trims the net credit.

The result is two vertical spreads joined at the center: a bull put spread below the current price and a bear call spread above it. The zone between the two short strikes is your profit range.

How the Payoff Works

The iron condor has a defined profit range and two defined maximum loss scenarios. Understanding the payoff structure before entering is non-negotiable.

Maximum profit equals the net credit collected, realized when the underlying closes between the two short strikes at expiration. All four legs expire worthless; you keep every dollar of premium. This is the "flat zone" — the range the market needs to stay inside for the full trade to work.

Maximum loss occurs if the underlying closes beyond either long strike at expiration (i.e., below the long put or above the long call). The loss is the wing width (the distance between the short and long strikes on one side) minus the net credit received. Because the spreads are symmetric in a standard iron condor, the max loss is the same on both sides. Importantly, you cannot lose on both wings simultaneously — the stock can only be in one place at expiration.

Breakeven points are where the trade transitions from profit to loss. There are two of them — one on each side:

• Upper breakeven: short call strike + net credit received
• Lower breakeven: short put strike − net credit received

As long as the underlying stays between these two breakeven points through expiration, the trade is profitable.

Concrete Example: SPY at $500

Suppose SPY is trading at $500 and you construct the following iron condor with 30 days to expiration:

Leg	Strike	Action	Premium
Long put	$480	Buy	−$0.75
Short put	$490	Sell	+$1.75
Short call	$510	Sell	+$1.75
Long call	$520	Buy	−$0.25
Net credit			+$2.50

• Max profit: $2.50 × 100 = $250 per contract — achieved if SPY closes between $490 and $510 at expiration
• Wing width: $10 (distance from $480 to $490, or $510 to $520)
• Max loss: ($10.00 − $2.50) × 100 = $750 per contract — if SPY closes below $480 or above $520
• Lower breakeven: $490 − $2.50 = $487.50
• Upper breakeven: $510 + $2.50 = $512.50

In this example, SPY can move up to $12.50 (2.5%) in either direction before the trade begins to lose money — a defined corridor around the current price.

Credit vs. Debit Iron Condor

The standard iron condor described above is a credit iron condor: you sell the two inner strikes (the "body") and buy the two outer strikes (the "wings"), collecting a net credit. This is the overwhelmingly common structure, and "iron condor" defaults to this version.

A debit iron condor reverses the structure: you buy the inner strikes and sell the outer wings, paying a net debit. This is a non-directional position that profits when the underlying exits the range — a long volatility stance. It is far less common and sometimes called a "reverse iron condor." Unless a source specifies otherwise, iron condor refers to the credit version.

When to Use an Iron Condor

The iron condor is not a universal tool. It performs best under a specific set of market conditions:

• Elevated implied volatility (high IVR): When IV rank is above 30–50, options premiums are inflated relative to what realized volatility typically delivers. Selling premium in a high-IVR environment means you're collecting more credit for the same strike distances — improving the reward-to-risk ratio. Iron condors entered in low-IVR environments often don't generate enough credit to justify the risk.
• Range-bound market expectation: The strategy requires the underlying to stay inside a corridor. It works best when there's no major catalyst (earnings, FOMC, product announcements) within the trade's life that could produce a large directional move.
• 30–45 days to expiration (DTE): This window captures the steepest part of theta decay — time value erodes fastest in the final 30–45 days. Going much longer gives the market more time to move against you; going shorter compresses the window for the trade to work.

Strike Selection

The most practical approach to strike selection uses delta as the primary guide. Most practitioners target short strikes in the 0.15–0.25 delta range — roughly a 15–25% probability of the stock finishing in-the-money at expiration. A 0.16-delta short strike implies approximately an 84% probability of expiring worthless, which is the statistical foundation for high-probability condor construction.

Going lower in delta (further OTM) increases the probability of success but shrinks the credit received, making the reward-to-risk ratio less favorable. Going higher in delta (closer to ATM) increases premium collected but narrows the profit zone and raises the chance of the trade being tested.

Wing width is the other key variable. Wider wings (e.g., $20-wide spreads vs. $10-wide) increase the max loss but also command higher premium — they require more capital at risk, but the higher credit can improve the percentage return on that risk. Narrower wings collect less premium but reduce the capital required per contract. Most traders balance wing width against the credit-to-wing-width ratio, aiming for the credit to represent 25–33% of the wing width as a minimum.

Managing the Iron Condor Trade

Entry is only half the job. Active management separates structured traders from those who hold through disaster.

Taking Profit Early

The standard guideline is to close the entire position at 50% of max profit. If you collected $2.50 in credit, close when you can buy back all four legs for $1.25. This locks in half the potential gain while eliminating the remaining risk. Studies across large sample sets consistently show that taking profits at 50% improves risk-adjusted returns versus holding to expiration, because the final 50% of profit requires all remaining time in the trade — with full tail risk intact.

Rolling a Tested Side

If the underlying rallies toward your short call, or drops toward your short put, you can defend by rolling the tested spread: buy back the threatened spread and re-sell it at a further OTM strike in a later expiration, collecting additional credit. Rolling is not always the correct response — it extends duration and can add to a losing position. Only roll if the underlying's move is believed to be temporary and not a sustained directional trend.

Stop-Loss Discipline

A common rule: close the position if the loss reaches 2× the credit received. On a $2.50 credit condor, that means exiting if the position's mark-to-market loss hits $5.00. This prevents a single trade from becoming a disproportionate drag on the portfolio. Mechanical stops are especially important in high-velocity markets where a condor can go from safe to max-loss territory rapidly.

How SpotGamma Helps Iron Condor Traders

Iron condor performance is directly tied to whether the underlying stays within your defined range. SpotGamma's data reveals where dealer hedging activity creates natural floors and ceilings — information that is structurally relevant to strike selection.

Call Wall as the Upper Short Strike Reference

The Call Wall in SpotGamma's Equity Hub identifies the strike with the largest concentration of positive gamma from dealer call positions. At this level, dealers are short calls and must sell into rallies to stay delta-neutral — creating mechanical resistance. This is not a magic barrier, but it is a level where sustained upward moves face structural headwinds. Placing your short call at or near the Call Wall aligns your strike with a level where the market has historically encountered supply.

Put Wall as the Lower Short Strike Reference

The Put Wall identifies the strike with the largest concentration of dealer put exposure, where dealers are long puts and must buy dips to hedge — creating a mechanical support floor. This buying activity tends to slow downward momentum near the Put Wall. Placing your short put at or near the Put Wall gives it the same structural backing: the level where downside moves face natural absorption. Together, the Call Wall and Put Wall define a dealer-driven corridor that directly maps to the iron condor's profit zone.

Volatility Dashboard for Entry Timing

The SpotGamma Volatility Dashboard provides IV rank, term structure, and skew data across the major indices. Use IV rank to confirm you are selling premium in a high-IVR environment — above 30 is a reasonable threshold; above 50 is ideal. The term structure view identifies whether short-dated options are elevated relative to longer-dated ones, which affects which expiration is most attractive for condor entry.

HIRO for Monitoring Directional Pressure

Once in a condor, the risk is a sustained directional move that tests one of your short strikes. The HIRO indicator tracks real-time options flow to identify whether call or put buying is accelerating — an early warning that directional pressure may be building. If HIRO is showing persistent call flow in an SPY condor, that's a signal the upper short strike deserves attention before price reaches it.

Use SpotGamma's Call Wall and Put Wall as strike references for your iron condors — grounded in real dealer positioning. Explore Equity Hub →

Iron Condor FAQ

What is the max loss on an iron condor?

The maximum loss on a standard iron condor is the wing width (distance between the short and long strike on one side) minus the net credit received, multiplied by 100 (per contract). In the SPY example above: $10 wing width − $2.50 credit = $7.50 max loss per share, or $750 per contract. This loss occurs if the underlying closes beyond either long strike at expiration. Critically, you cannot lose the max on both sides simultaneously — the loss is limited to whichever side gets breached.

When should you close an iron condor?

The most widely used rule is to close at 50% of max profit — taking half the potential gain while eliminating all remaining risk. Additionally, consider closing early if: (1) the position reaches your stop-loss level (commonly 2× credit received), (2) there are fewer than 7–10 days to expiration and the position is still at risk (gamma risk accelerates sharply in the final week), or (3) a fundamental change in market conditions — an earnings surprise, macro shock, or breakout from a key technical level — invalidates the original range-bound thesis.

Is an iron condor bullish or bearish?

Neither. An iron condor is a neutral strategy — it profits when the underlying stays flat and loses when the underlying makes a large directional move in either direction. It has no inherent directional bias. Some traders construct slightly asymmetric condors (placing one side closer to the current price than the other) to express a mild lean, but the core structure is non-directional.

What is the difference between an iron condor and a strangle?

A short strangle also sells an OTM call and OTM put to profit from a neutral market, but it carries undefined risk on both sides — a sharp enough move in either direction can produce theoretically unlimited losses. An iron condor adds the two long wings (long OTM put and long OTM call) to cap those losses. This defined-risk structure makes iron condors suitable for traders who want the same neutral premium-selling exposure as a strangle but with clearly bounded downside — and who may be trading in accounts where naked options are not permitted.

How much capital does an iron condor require?

Most brokers require margin equal to the maximum risk of one side of the iron condor, since both sides cannot simultaneously reach max loss. For a $10-wide iron condor that collected $2.50 in credit, the capital requirement is typically ($10.00 − $2.50) × 100 = $750 per contract. Some brokers require the full wing width ($1,000) before netting the credit. Check your broker's specific margin treatment for defined-risk spreads before sizing a position.

Can you trade iron condors on any underlying?

Technically yes, but liquidity is critical. Iron condors involve four legs, and wide bid-ask spreads in illiquid underlyings can erode most or all of the edge before the trade even begins. Traders typically stick to highly liquid underlyings — SPY, QQQ, SPX, IWM — where the spread markets are tight and fills are reliable. Single stocks are viable for experienced traders but introduce earnings and event risk that can produce overnight gaps well beyond the long strike protection.

---

This article is for educational purposes only and does not constitute financial or investment advice. Options trading involves significant risk of loss. Past performance of any strategy or tool does not guarantee future results. Always consult a licensed financial professional before making investment decisions.