Iron Condor

An iron condor is an options strategy built from four separate option contracts that pays off if the underlying stock stays within a defined price range through expiration. It is a bet on low movement, rather than a bet on the stock going up or down.

To build one, a trader sells a call and buys a call further out of the money above the current price (this pair is a call credit spread), and sells a put and buys a put further out of the money below the current price (a put credit spread). Selling an option means collecting money upfront for the obligation it creates; buying the further-out option caps the risk on that side. Combined, the trade collects a net premium (cash received when opening the position) upfront, and that premium is the maximum possible profit. The four strike prices — the fixed prices at which each option can be exercised — form a "body" (the range between the two sold options where the trade earns its full profit) and two "wings" (the bought options that limit losses if the stock moves too far in either direction).

The nuance that trips people up is that the maximum loss is also fixed and is usually larger than the maximum gain — it equals the width of one of the spreads minus the premium collected. So an iron condor typically risks more dollars than it can make, and it relies on the stock staying quiet, not on being right about direction. Many traders close the position early, well before expiration, once most of the premium has decayed, rather than holding to see if the range holds exactly.

It's also easy to confuse an iron condor with a plain "condor" (built with only calls or only puts) or a strangle (which has no wings and so carries open-ended risk). The "iron" in the name simply signals that both a call spread and a put spread are combined into one four-legged position.