The iron condor consists of constructing both a bull put spread and a bear call spread on the same underlying stock with the same expiration date.

By doing so, you create a trading range that, if the underlying stock stays within, can result in some pretty decent income.

If you’re unfamiliar with bull put and bear call spreads, please review those option trading strategies first. The iron condor is very easy to comprehend once you’ve got the other strategies down.

And for clarification on any of the option terminology or definitions, be sure to consult the Options Trading Education resource page.

Iron Condor Overview

Specifically, you would write an out of the money put option and purchase a farther out of the money put option to form a bull put ). This forms the lower boundary of the condor.

At the same time, you would also write an out of the money call option and purchase a farther out of the money call option to form a bear call. This in turn forms the upper boundary of the condor.

The trade produces a net credit. Actually, since it’s formed with both a bull put and bear call, it produces two net credits. The maximum gain is the total amount of net credit received if the share prices finishes between the higher strike price put and the lower strike price call.

If you like the insurance company metaphor we used earlier on the bull put page. you can view the condor trade in similar terms. In this case, you’re insuring a specific stock in another investor’s portfolio from both increases AND decreases in share price. In effect, you’re insuring against moves outside a pre-determined trading range.

As with bull put spreads and bear call spreads, there are three variables involved in this trade:

• Range (strike prices)
• Duration (expiration date)
• Income (net premium)

Iron Condor Example

The XYZ Zipper Company is trading at $30/share.

Earnings season is still two months away and the company hasn’t produced a controversy in quite some time. You feel confident that the stock won’t stray very far from its current price in the near term.

You consult the stock’s option chain and decide to employ an iron condor option trading strategy, setting up both a bull put spread and a bear call spread.

For simplicity’s sake, let’s assume that you set up both the bull put and bear call portions of the trade at the same time (although that isn’t required), and all expiration dates are 30 days away:

• You sell a $27.50 put option for $1/contract and purchase a $25 put option for $0.50/contract (netting you a $0.50 credit).
• You then sell a $32.50 call option for $1/contract and purchase a $35 call option for $0.50/contract (netting you another $0.50 credit).
• Excluding commissions, you receive a net credit of $1/contract, or $100 ($2 in total credits less $1 in total debits).

To realize your maximum gain, you want XYZ to close at expiration anywhere in the $27.50-$32.50 range.

The table below illustrates the possible scenarios depending upon the stock’s final share price.

Bull Put Portion