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Trading options can seem overwhelming to a beginner, given the large number of strategy variations that can be created. Option trading allows a trader to make profits in virtually any market environment, including markets that are moving sideways. One strategy that profits from a neutral market environment and that provides solid profits is an iron condor.

The goal of this series of articles will be to teach readers what an iron condor is, how to find the right security to enter this strategy on and how to exit the trade. We will do this by entering a trade that we track from week to week, helping us learn from the movement of the trade. This is not an attempt to provide readers with a real trade to call your broker and enter. Rather, we are trying to show how the strategy is set up and how it fares given the movement in the underlying security.

Before we dive into the iron condor, it is important to understand the makeup of a spread in general. A spread is created when we buy two different options, whether they are distinguished by different expirations or different strike prices. In the case of an iron condor, we are using options that have the same expiration, but different strike prices.

Spreads can be created with either a debit or credit with the latter what is created when we enter an iron condor. This strategy is set up by buying a lower strike put, selling a higher strike put, selling an even higher strike call and buying an even higher strike call. In essence, we are entering both a bull put spread and a bear call spread and combining them. Here is a general risk graph of an iron condor:

Figure 1: Generic Risk Graph of the Iron Condor

This risk graph in Figure 1 shows us a lot about an iron condor. This strategy has limited risk and limited reward and profits if the underlying stays in a range. This risk graph looks identical to the risk graph of a regular condor, but the set up of the two is a bit different.

A condor is set up using all puts or all calls and creates a debit. An iron condor is set up using both puts and calls and results in a credit, although the reward to risk is identical. The way to decide using one or the other is solely based on reward to risk. Sometimes we can create a better trade using both calls and puts because of differing implied volatility. Some traders would prefer having a credit strategy as well because if the underlying closes in the profit zone, the trader doesn’t need to do anything to close the trade.

So what is it we are looking for in the underlying when trading an iron condor? The first criterion is that we want a security that is expected to move sideways. This can be a stock that is consolidating after a large move or possibly an index that is trading in a range. We normally are looking to use front month options or the next month out. This is because an iron condor benefits from the passage of time and time decay picks up the last 45 days of an options life.

Indices are great to use in iron condors because we don’t get the sharp sudden moves that can occur in individual stocks. The risk we have when trading an iron condor is that the underlying will move sharply higher or lower, taking the stock beyond the breakeven points. In order to better understand how an iron condor works, let’s set up a mock trade and follow it through expiration.

Since we like using index options for iron condors, we decided to use one for this mock trade. The Russell 2000 ($RUT) seems to have built support near its 50-day moving average found just below 700 with resistance found near 740. This means we would like to set up an iron condor that profits as long as the RUT closes between 700 and 740 at expiration.

Figure 2: Daily Chart of RUT

Normally, an iron condor would be set up using equally spaced option strikes, but this doesn’t have to be the case. In fact, with our mock trade, we are going to use the 680-700-740-760 puts and calls for May expiration. This gives us a max profit between 700 and 740 with the RUT closing Wednesday, April 9 at 698.38. Below is the risk graph for this particular trade.

Figure 3: Risk Graph of RUT Iron Condor

This trade has 36 days until expiration with a reward to risk ratio of $1,205 to $795. Of course, this does not include the cost of commissions and assumes we get into the spread to set up a more profitable trade. Each week, we will break down different aspects of this strategy as it relates to this trade on the Russell 2000. In the meantime, feel free to post questions or make comments on my forum so that we can all learn from each other. 


Jody Osborne

Senior Writer & Options Strategist

Optionetics.com ~ Your Options Education Site

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