How an iron condor works
An iron condor is a bull put spread and a bear call spread on the same shares and expiry. You collect two credits and profit if the shares stay between the short strikes. Only one side can lose at expiry, so the broker holds margin for the wider side only.
max profit = total credit × 100
max loss = (wider wing − credit) × 100
breakevens = short put − credit and short call + credit
A worked example
With the figures loaded above, the shares are at $100. You sell the 95/90 put spread and the 105/110 call spread for a total credit of $1.50.
- Maximum profit is $150, if the shares finish between $95 and $105.
- Maximum loss is ($5 − $1.50) × 100 = $350, beyond either long strike.
- Breakevens are $95 − $1.50 = $93.50 and $105 + $1.50 = $106.50.
- Return on risk is $150 ÷ $350 = 42.9%, and the break-even win rate is $350 ÷ $500 = 70%.
Wing width against the expected move
The one-standard-deviation expected move is share price × implied volatility × √(days ÷ 365). At 25% volatility and 30 days that is $100 × 0.25 × 0.287 = ±$7.17. The profit zone here runs only ±$6.50 either side of the price, so both breakevens sit inside the range the market expects.
Under a lognormal model at the same volatility, the chance of finishing between the breakevens is about 64%, below the 70% this condor needs to break even if every trade were all-or-nothing. That gap is the credit being thin for the risk, not bad luck. Real trades are rarely all-or-nothing, because positions are usually closed or adjusted early, but the comparison is a fast sanity check.
Around earnings the expected move widens sharply, and so do the premiums. The expected move calculator reads it from the straddle price, which is usually a better guide than a volatility you type in.
Where condors go wrong
- One bad move costs several winners. At $150 to make and $350 to lose, one full loss takes two and a third winners to recover.
- Gaps skip the management. An earnings gap can open beyond a long strike before you can react.
- Assignment. A short leg in the money near expiry can be assigned, leaving you with shares over a weekend.
- The model is a model. Real returns have fatter tails than a lognormal curve, so large moves happen more often than the probability suggests.
Size from the maximum loss, not the margin: see how many option contracts to trade.