An iron condor strategy is one form of the so-called “wingspan” spread option trading strategies. The iron condor strategy is used by an option trader who knows what is options trading, and who may be day trading options, or even trading options for income full-time. The iron condor option strategy is built of 2 vertical spreads, namely a put spread with a call spread that each expire on the same date, with 4 different strike prices. The version most often used is the long iron condor strategy. The iron condor strategy has limited risk and may enjoy a high probability of bringing a modest profit during times in which the option trader believes the underlying stock has very low volatility. In some ways, the iron condor strategy has a similar effect as a strategy constructed of a bear call spread and a bull put spread.

Whats in the name? 

A new options trader who is involved in online options trading soon learns that the name of the iron condor strategy comes from the profile of the graph showing profit and loss from its trades, which is said to bear a resemblance to a large bird like a condor. To carry the analogy still further, the option trader describes the inner set of options as being like a body of the bird, while the outer set of options appear to be wings.

The experienced options trader understands the word iron to mean that this trade is built with a combination of both puts and calls, which is accomplished by a combination of bear call spread and bull put spread, similar to the iron butterfly options strategy. The credit spreads are combined to create a credit spread, even though the direction of the trade is generally long. This is different from the ordinary condor strategy and the ordinary butterfly strategy. which are built entirely of calls or entirely of puts, and the trade represents a combination of bear call spread and bull call spread, or bear put spread and bull put spread. In contrast to the “iron” version, the ordinary long condor and ordinary long butterfly are a combination of credit spread and debit spreads, so an option trader often enters those positions with a small net debit.

How to construct an iron condor strategy

A long iron condor is created when an option trader buys the outer strike prices and sells the inner strike prices. When the option trader enters a converse position, the result is the short iron condor. The iron condor option strategy uses the same number of call spreads as put spreads. The option trader sells one out-of-the-money put, buys one out-of-the-money put at a lower strike price, and also sells one out-of-the-money call and buys one out-of-the-money call at a higher strike price. The option trader chooses options which expire in the same month. The iron condor option strategy usually creates a net credit trade.