Iron Condor

The iron condor is an advanced option trading strategy utilising two vertical spreads – a put spread and a call spread with the same expiration and four different strikes. If the outer strikes are bought and the inner strikes sold a long iron condor is produced. The converse produces a short iron condor. The number of call spreads will be equal to the number of put spreads.

The position is so named because of the shape of the profit/loss graph, which loosely resembles a large-bodied bird, such as a condor. In keeping with this analogy, traders often refer to the inner options collectively as the "body" and the outer options as the "wings". The word iron in the name of this position indicates that, like an iron butterfly, this position is played across the current spot price of the underlying instrument having one vertical spread below and one vertical spread above the current spot price. This distinguishes the position from a plain Condor position, which would be played with all strikes above, or below the current spot price of the underlying instrument. A Call Condor would be played with all call contracts and a Put Condor would be played with all put contracts.

One of the practical advantages of an iron condor over a single vertical spread (a put spread or call spread), is that the initial and maintenance margin requirements for the iron condor are often the same as the margin requirements for a single vertical spread, yet the iron condor offers the profit potential of two net credit premiums instead of only one. This can significantly improve the potential rate of return on capital risked when the trader doesn't expect the underlying instrument's spot price to change significantly.

Another practical advantage of the iron condor is that if the spot price of the underlying is between the inner strikes towards the end of the option contract, the trader can avoid additional transaction charges by simply letting some or all of the options contracts expire. If the trader is uncomfortable, however, with the proximity of the underlying's spot price to one of the inner strikes and/or is concerned about pin risk, then the trader can close one or both sides of the position by first re-purchasing the written options and then selling the purchased options.