Option Strategies

Iron Condor

An Iron Condor Option is the ultimate options combining strategy. It is basically two vertical option spreads combined into one strategy. You use this technique in a couple of scenarios. One is when you are dealing with a cyclical stock and you are relatively sure the price will be in a certain range for the time period in question.

Before going on, I would suggest you read through Vertical Spread section again and then come back to this section.

Some important things to note about Iron Condors:

It is typically a credit spread; that is you receive money for taking the position.
Two credit vertical spreads makeup the entire Iron Condor spread. One Bear Call and one Bull Put.
The two verticals must be for the same expiration month.
The number of contracts for both verticals must be the same. I.e., if the Call Spread is for 10 contracts each, then the Put Spread must be 10 contracts each.

Right off the bat, you will notice that you will be trading a lot of contracts. Even when per-contract commissions are low, wide bid/ask spreads and fees can still erase a thin iron condor credit—so liquidity matters as much as the commission schedule.

Lets take an example:
VZ is currently trading at $28.

Option Type	Action	Contracts	Symbol	Strike	Exp Month
Call	Sell	-12	VZ	30	AUG
Call	Buy	12	VZ	31	AUG
Put	Sell	-12	VZ	25	AUG
Put	Buy	12	VZ	24	AUG

Just as a recap, remember that the objective of the Bear Call Spread is to watch the stock fall below the short strike option (i.e., VZ $30 AUG). If that happens you keep the credit. If not, then the most you lose is the spread itself. In this case, $100 per contract. In the case of Bull Put Spread, your objective is to watch the stock rise above the short strike option (i.e., VZ $25 AUG). The consequences are the same as in the Bear Call Spread.

You will notice right away that VZ is trading at $28 and there is a $5 buffer. I.e., the difference between the $30 Strike Price Call and $25 Strike Price Put. Although this stock can move, it traditionally doesn't move so much in any given month. So as long as Verizon doesn't go above $30 and below $25, you get to keep your net credit. In this illustrative example, assume the iron condor brings in about $0.25 per share ($25 per one-lot iron condor). Twelve lots would bring in about $300 before fees. If Verizon did make a strong move in one direction, then the max loss would be similar to a regular vertical spread on that side (here, $1 wide wings means roughly $100 max loss per lot before counting the credit kept and the other side). The credit from the untested side helps buffer the loss, but a gap through the short strike can still hurt.

You should be asking yourself about now why put on 48 option contracts (12 on each of four legs) just to bring in a few hundred dollars of credit. That is where commissions, fees, and wide bid/ask spreads matter. Even in a low-commission environment, slippage and assignment risk can erase a small credit. An iron condor is a defined-risk income strategy when both wings are in place, but it is not "very safe"— you can lose several times the credit if the underlying trends or gaps hard. Size carefully, prefer liquid underlyings, and treat it as one tool—not free monthly cash flow.

There are other flavours of related condor structures you may meet later. As always, paper trade first and confirm the max loss shown by your broker before you send a live order.