Iron Condor

An iron condor combines two credit spreads: a bull put spread below the current price and a bear call spread above it. The trader receives a net premium upfront and keeps it if the price stays between the two inner exercise prices until expiry.

For example, with a share trading at 100, a trader sells a put with an exercise price of 95 and a call with an exercise price of 105, and buys a put at 90 and a call at 110. Suppose the net premium received is 3.00. If the share stays between 95 and 105, the trader keeps the full 3.00. The maximum loss, if the share falls below 90 or rises above 110, is the 5.00 gap between exercise prices minus the 3.00 received, or 2.00.

Iron condors are popular when traders expect low volatility. Both profit and loss are limited, making the risk defined in advance.

The trade-off is that the potential profit is usually smaller than the potential loss, so the strategy needs to succeed most of the time. Sharp moves or rising volatility can quickly turn it into a loss.