Iron Condor Options Strategy: Construction, Payoff and Worked Example
An iron condor is a four-leg, defined-risk options strategy that combines a short out-of-the-money put spread and a short out-of-the-money call spread on the same underlying and expiration. The position collects a net credit at entry and profits when the underlying closes between the two short strikes at expiration.
Construction
An iron condor has four legs on the same underlying and expiration. The put spread (left side) and call spread (right side) each contribute part of the net credit.
| Side | Leg | Action | Strike | Role |
|---|---|---|---|---|
| Put side | Short put | Sell 1 OTM put | Higher (closer to ATM) | Collects premium; defines short put strike |
| Put side | Long put | Buy 1 OTM put | Lower (further OTM) | Caps downside loss; defines put wing |
| Call side | Short call | Sell 1 OTM call | Lower (closer to ATM) | Collects premium; defines short call strike |
| Call side | Long call | Buy 1 OTM call | Higher (further OTM) | Caps upside loss; defines call wing |
The gap between the two short strikes is the “body” of the condor — the zone where maximum profit is realized. Wider bodies increase the probability of profit but reduce the credit collected. Traders balance these trade-offs when selecting strikes.
Payoff Formulas at Expiration
If the put and call wings have different widths, maximum loss is determined by the wider wing. Standard iron condors use equal-width wings on both sides.
Worked Example
| Input | Value |
|---|---|
| Underlying (XYZ) | $100.00 |
| Short put strike | $90 — sold for $1.20 |
| Long put strike | $85 — bought for $0.60 |
| Short call strike | $110 — sold for $1.10 |
| Long call strike | $115 — bought for $0.50 |
| Net credit | $1.20 + $1.10 − $0.60 − $0.50 = $1.20 per share ($120 total) |
| Wing width | $5 on each side ($90−$85 put wing; $115−$110 call wing) |
Max profit: $1.20 × 100 = $120 (XYZ between $90 and $110 at expiry)
Max loss: ($5.00 − $1.20) × 100 = $3.80 × 100 = $380 (XYZ at or beyond $85 or $115)
Lower breakeven: $90 − $1.20 = $88.80
Upper breakeven: $110 + $1.20 = $111.20
Arithmetic verification at five expiration prices
At $82 (below put wing): Short $90 put: $90−$82 = $8 ITM → −$8 + $1.20 = −$6.80. Long $85 put: $85−$82 = $3 ITM → +$3 − $0.60 = +$2.40. Short $110 call: +$1.10 (OTM). Long $115 call: −$0.50 (OTM). Total: −$6.80 + $2.40 + $1.10 − $0.50 = −$3.80. Max loss confirmed.
At $88.80 (lower breakeven): Short $90 put: $90−$88.80 = $1.20 ITM → −$1.20 + $1.20 = $0. Long $85 put: +$0 − $0.60 = −$0.60. Short $110 call: +$1.10. Long $115 call: −$0.50. Total: $0 − $0.60 + $1.10 − $0.50 = $0. Breakeven confirmed.
At $100 (body): All four options OTM. Short $90 put: +$1.20. Long $85 put: −$0.60. Short $110 call: +$1.10. Long $115 call: −$0.50. Total: +$1.20. Max profit confirmed.
At $111.20 (upper breakeven): Short $110 call: $111.20−$110 = $1.20 ITM → −$1.20 + $1.10 = −$0.10. Long $115 call: −$0.50. Short $90 put: +$1.20. Long $85 put: −$0.60. Total: −$0.10 − $0.50 + $1.20 − $0.60 = $0. Upper breakeven confirmed.
At $118 (above call wing): Short $110 call: $118−$110 = $8 ITM → −$8 + $1.10 = −$6.90. Long $115 call: $118−$115 = $3 ITM → +$3 − $0.50 = +$2.50. Short $90 put: +$1.20. Long $85 put: −$0.60. Total: −$6.90 + $2.50 + $1.20 − $0.60 = −$3.80. Max loss confirmed.
Payoff table
| XYZ at expiry | P&L per share | P&L total | Note |
|---|---|---|---|
| $82 | −$3.80 | −$380 | Max loss (put wing breached) |
| $88.80 | $0 | $0 | Lower breakeven |
| $100 | +$1.20 | +$120 | Max profit (between short strikes) |
| $111.20 | $0 | $0 | Upper breakeven |
| $118 | −$3.80 | −$380 | Max loss (call wing breached) |
Expiration and Assignment Mechanics
The OCC automatically exercises any option at expiration with $0.01 or more of intrinsic value. For the iron condor at the example strikes:
- XYZ between $90 and $110: All four options expire worthless. Full credit kept. No assignment.
- XYZ between $85 and $90 (put wing): Short $90 put is assigned; long $85 put partially offsets. Net loss between $0 and $3.80/share.
- XYZ between $110 and $115 (call wing): Short $110 call is assigned; long $115 call partially offsets. Net loss between $0 and $3.80/share.
- XYZ at or below $85, or at or above $115: Full wing loss ($3.80/share = $380). The long option exactly caps the loss.
Pin risk exists if XYZ closes at or very near the short strike on expiration day. Early close before expiration eliminates pin risk. (Source: OCC)
Margin and Capital Requirement
An iron condor is a defined-risk strategy. The margin requirement is typically the maximum loss per set: (wing width − net credit) × 100. For the example: ($5.00 − $1.20) × 100 = $380 per iron condor. If the wings are unequal, the wider side determines the margin. No additional buying power is consumed beyond this requirement because the long options cap the maximum loss on each side.
Iron Condor vs. Iron Butterfly
| Feature | Iron Condor | Iron Butterfly |
|---|---|---|
| Short strikes | Two separate OTM strikes (put + call) | Both at the same ATM strike |
| Net credit | Lower (OTM options are cheaper) | Higher (ATM options are more expensive) |
| Profitable range | Wider (gap between short strikes ± credit) | Narrower (short strike ± net credit) |
| Payoff shape | Flat plateau between short strikes | Tent peak at short strike |
| Ideal market outlook | Underlying stays in a broad range | Underlying stays near ATM strike |
Drill iron condor flashcards or model this position in the P&L calculator.
Options Profit CalculatorMore Strategy Guides
- Iron Butterfly — narrower wings, higher credit, narrower profit zone
- Bear Call Spread — the call-spread half of the iron condor
- Bull Put Spread — the put-spread half of the iron condor
- Calendar Spread — time-based approach targeting the same low-volatility environment
- Covered Call — long stock + short OTM call
- Cash-Secured Put — short put + full cash collateral
- Protective Put — long stock + long put, downside hedge
- Wheel Strategy — CSP to assignment to covered call cycle
Frequently Asked Questions
- What is an iron condor?
- An iron condor is a four-leg options strategy combining a short out-of-the-money put spread and a short out-of-the-money call spread on the same underlying and expiration. The position profits when the underlying closes between the two short strikes at expiration.
- What is the maximum profit on an iron condor?
- Maximum profit equals the net credit received. It is realized when the underlying closes between the two short strikes at expiration — both spreads expire worthless and the full credit is kept.
- What is the maximum loss on an iron condor?
- Maximum loss equals the widest wing width minus the net credit. Wing width is the distance between the short and long strike on either the put side or the call side. Example: wings of $5 each, net credit $1.20 — max loss = $5.00 − $1.20 = $3.80 per share = $380 total. Loss is capped because the long options limit downside beyond the outer strikes.
- What are the breakevens of an iron condor?
- Lower breakeven = short put strike minus net credit. Upper breakeven = short call strike plus net credit. Example: short put $90, short call $110, net credit $1.20 — lower breakeven = $88.80, upper breakeven = $111.20.
- How does an iron condor differ from an iron butterfly?
- An iron condor has two different short strikes — one OTM put and one OTM call — creating a wider profitable range between them. An iron butterfly has a single shared short strike (ATM), producing a tent-shaped payoff with higher maximum credit but a much narrower profitable range. The condor trades a lower credit for a wider window.