An iron condor is a multi-leg, risk-defined, neutral strategy with limited profit potential.
Iron condors are created by selling-to-open (STO) a credit spread above and below the current stock price. This involves selling an out-of-the-money option and buying a further out-of-the-money option.
For example, if a stock is trading at $100, a bull put spread could be opened by selling a put at the $95 strike price and buying a put at the $90 strike price. A bear call spread could be opened by selling a call at the $105 strike price and buying a call at the $110 strike price. This creates a $10 wide iron condor with $5 wide wings. If the credit received to enter the trade is $2.00, the max loss would be -$300, and the max profit potential would be $200.
- Buy-to-open: $90 put
- Sell-to-open: $95 put
- Sell-to-open: $105 call
- Buy-to-open: $110 call
The spreads can be any width and any distance from the current stock price. The closer the strike prices are to the underlying’s price, the more credit will be collected. The larger the width of the spread is between the short option and the long option, the more premium will be collected, but the maximum risk will be higher.
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