How an Iron Condor works
An Iron Condor aims to profit from a stock or underlying index that doesn't move much in the near term. The strategy seeks to generate options income with limited downside risk. An Iron Condor consists of four options trades, or legs, which an investor can set up to execute as a single trade with most options trading platforms.
Here's how to set up an Iron Condor:
- Buy a put with a strike price below the current price of the underlying stock or market index. This put option helps protect against a significant decline in the underlying equity and limit the loss.
- Sell a put with a strike price closer to the current price of the underlying stock or index.
- Sell a call with a strike price above the current price of the underlying stock or index.
- Buy a call with a strike price further above the current price of the underlying stock or index. This call option will help protect against a significant upside move in the underlying equity and cap a potential loss.
All four options trades will have the same expiration date, usually 30 to 45 days in the future.
An Iron Condor has two breakeven points:
- The strike price of the sold put minus the net credit received.
- The strike price of the sold call plus the net credit.
An Iron Condor can achieve its maximum profit (i.e., the total net credit received) when the underlying stock or option closes between the strike prices of the sold put and call at expiration.
Meanwhile, the maximum loss occurs if the underlying stock or index closes above the purchased call or below the purchased put at expiration. However, the loss is limited in both cases.
