Iron Condor Strategy: How It Works, Formulas, and Examples
The iron condor is a four-leg options strategy that profits when a stock or ETF stays within a defined range. It is the preferred strategy for traders who expect low volatility and want to collect premium from time decay without taking a directional bet.
In this guide
1. What Is an Iron Condor?
An iron condor combines two credit spreads — an OTM call credit spread above the market and an OTM put credit spread below it. You sell an OTM call and buy a further OTM call (the call spread), and simultaneously sell an OTM put and buy a further OTM put (the put spread).
All four legs share the same expiration. You collect a net credit upfront. The trade profits if the underlying stays between the two short strikes at expiration. If the stock moves too far in either direction, one of the spreads will be tested.
The iron condor is a defined-risk, defined-reward trade. Your maximum gain is the credit collected. Your maximum loss is capped by the long options you bought on each side.
2. Maximum Profit Formula
Maximum profit is achieved when the underlying closes between the two short strikes at expiration. All four legs expire worthless and you keep the entire net credit.
Max Profit = Net Credit Collected × 100
Net Credit = Call spread credit + Put spread credit
3. Maximum Loss Formula
Maximum loss occurs when the stock moves far enough to breach the long strike on either side. The loss is capped because you own the outer options. It equals the width of the wider spread minus the credit you collected.
Max Loss = (Spread Width − Net Credit Collected) × 100
Spread Width = difference between short and long strike (use the wider side if asymmetric)
4. Two Breakeven Calculations
The iron condor has two breakeven points — one on the upside and one on the downside. The profit zone is the range between them.
Upper Breakeven = Short Call Strike + Net Credit
Lower Breakeven = Short Put Strike − Net Credit
5. Worked Example with SPY
SPY is trading at $520. You expect it to stay between $510 and $530 for the next 30 days. Here is a typical iron condor setup:
Trade Setup
- Call spread: Sell $530 call at $2.00 / Buy $535 call at $0.80
- Put spread: Sell $510 put at $2.00 / Buy $505 put at $0.80
- Net credit: ($2.00 − $0.80) + ($2.00 − $0.80) = $2.40 per share
- Spread width: $5 on each side
Max Profit: $2.40 × 100 = $240 per contract
Max Loss: ($5.00 − $2.40) × 100 = $260 per contract
Upper Breakeven: $530 + $2.40 = $532.40
Lower Breakeven: $510 − $2.40 = $507.60
SPY needs to stay between $507.60 and $532.40 for the trade to be profitable. That is a $24.80 wide profit zone, or roughly ±2.4% from current price. If SPY closes anywhere in that range, you collect the full $240 credit.
6. When to Use an Iron Condor
- •Low volatility expected. Iron condors profit from time decay and a stable price. If volatility spikes, the spread values increase and your position loses.
- •After a volatility event. Selling condors after earnings or macro events lets you collect elevated IV while expecting things to calm down.
- •Range-bound underlyings. Indices like SPY and QQQ are natural condor candidates — they move less than individual stocks.
- •You want defined risk. Unlike naked options, the long strikes on both sides cap your maximum loss regardless of how far the market moves.
7. Free Iron Condor Calculator
Model any iron condor setup instantly — enter your four strikes and premiums, and the calculator shows max profit, max loss, both breakevens, and a full P&L chart across all price scenarios. No signup required.
Open Iron Condor Calculator