Agora Circle
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Neutral4 LegsDefined risk

Iron Condor

Sell a put spread below the market and a call spread above it. Earn premium in a range with every outcome, good or bad, fixed at entry.

By Team Agora Circle

Written by the Agora Circle editorial team. Educational content, explained for the Indian market. Not investment advice.

Market outlook
Neutral. You expect the underlying to stay inside a defined range.
Setup
Sell an out of the money put spread and an out of the money call spread, same expiry.
Max profit
Limited to the net credit received for all four legs.
Max loss
The wing width minus the net credit. Fixed and known at entry.
Breakeven
Short call strike plus the credit above, short put strike minus the credit below.
Implied volatility
Falling implied volatility helps. The wings temper the damage from spikes.
Time decay
Positive inside the range. Decay on the short strikes outpaces the wings.

Strategy Overview

An iron condor is a short strangle wearing a seatbelt. You sell a put below the market and a call above it, then buy a further out of the money put and call as wings. The four legs net to a credit, and the wings convert the strangle's open tails into a fixed, known maximum loss.

The trade earns its keep when the market goes nowhere. Inside the short strikes at expiry, all four options die worthless and the whole credit is banked. The name of the game is selling movement that never materialises, over and over, with a worst case small enough to survive comfortably when the range finally breaks.

Because risk is defined, margin is a fraction of the naked strangle's, making the condor the practical range strategy for most retail accounts. The cost of the seatbelt is real: the wings eat a slice of the premium, so condors collect less than their naked cousins.

How to Set It Up

Four legs, one expiry, entered together for a net credit. Symmetric wings keep the position balanced.

  1. 1Sell 1 put (PE) below the market at the bottom of your expected range.
  2. 2Buy 1 put (PE) at a lower strike as the downside wing.
  3. 3Sell 1 call (CE) above the market at the top of your expected range.
  4. 4Buy 1 call (CE) at a higher strike as the upside wing, collecting the net credit.

Payoff Diagram and Example

Max Profit

Limited to the net credit received for all four legs.

Max Loss

The wing width minus the net credit. Fixed and known at entry.

Breakeven

Short call strike plus the credit above, short put strike minus the credit below.

Iron Condor payoff diagram024,00024,50025,50026,000BE 24,410BE 25,590Max profit +90Max loss -410ProfitLossNIFTY at expiry

Suppose NIFTY is at 25,000 inside a well worn range. You sell the 24,500 PE for 90 and the 25,500 CE for 90, and buy the 24,000 PE for 45 and the 26,000 CE for 45 as wings. The net credit is 90 points, or 90 x 75 = Rs 6,750 per lot.

If NIFTY expires anywhere between 24,500 and 25,500, every leg expires worthless and the full credit is yours. The breakevens are 24,410 and 25,590.

Beyond a breakeven, losses grow only until the wing: 500 points of width minus the 90 credit caps the worst case at 410 points, or Rs 30,750, whether the index expires at 26,000 or gaps to 27,000. That number was known before the trade was placed.

Entering and Exiting

Enter all four legs as one order where your broker supports it, working a limit on the net credit. Condor pricing improves meaningfully with patient limit orders because you are crossing four bid ask spreads.

The bread and butter exit is buying the condor back once 50 to 70 percent of the credit has decayed. Holding for the final points through expiry week exposes the position to pin risk and gaps for minimal remaining reward.

If one side is tested, close or adjust before the short strike goes in the money. The defined loss is a safety net, not a target; consistently exiting at half the maximum loss keeps the strategy's arithmetic healthy.

Time Decay (Theta)

Inside the range, theta is the condor's engine. The short strikes, closer to the money, decay faster than the cheap wings, and the difference accrues daily, accelerating into the final two weeks.

Near a short strike the picture muddies: decay slows on the tested side and the position increasingly behaves like a directional spread. Time only remains an ally while the index respects the range.

Implied Volatility (Vega)

Condors are short vega and love a volatility crush. Entering when IV is elevated, after event driven spikes or in fearful markets that then calm, lets you profit from normalisation on top of decay.

The wings blunt volatility spikes far better than a naked strangle, one of the structure's main comforts. A spike still hurts the mark to market, but it cannot push the loss past the fixed maximum.

Common Adjustments

Roll the untested spread toward the market when one side is challenged: after a rally, roll the put spread up to collect fresh credit that widens the tested breakeven. This is the standard condor defence.

Roll the whole structure out in time if the range thesis remains intact but needs more room, closing the current condor and opening next expiry's, ideally for an additional credit.

When the range breaks decisively, close the position. The tested spread is nearing its capped loss anyway, and the credit from serial adjustments rarely outruns a genuine trend.

Synthetic Equivalent

An iron condor is a short strangle with protective wings added, or equivalently a bull put spread and a bear call spread that share the same expiry. The two credit spreads together form the four leg structure.

Because both wings are defined, it is simply the capped risk version of selling a strangle for premium.

Pros and Cons

Pros

  • Every outcome is bounded: maximum loss is fixed at entry.
  • Earns from time decay across a wide profit range.
  • Far smaller margin than naked strangles or straddles.
  • Benefits from falling implied volatility.

Cons

  • Credit is smaller than a strangle's because the wings cost premium.
  • Maximum loss is usually several times the maximum profit.
  • Four legs mean more transaction cost and fill slippage.
  • Choppy markets can test both sides in a single expiry.

Frequently Asked Questions

How is an iron condor different from a short strangle?

The condor adds a bought wing beyond each short strike. Those wings cap the maximum loss at a fixed number and slash the margin requirement, in exchange for a smaller net credit. Same range view, defined instead of open ended risk.

How do I choose the four strikes?

Place the short strikes at the edges of the range you trust, commonly around a 0.15 to 0.25 delta per side, then set the wings a fixed width beyond them. Narrow wings cost little premium but cap losses tightly; wider wings collect more credit with a larger worst case.

What is pin risk at expiry?

It is the uncertainty when the index hovers exactly around a short strike in the final session, where a few points decide whether the option expires worthless or in the money. Closing the condor before expiry week sidesteps the problem entirely, which is one reason early exits are standard.

Why is my maximum loss bigger than my maximum profit, and is that bad?

Credit structures trade frequency for size: the condor wins most expiries and loses occasionally. The arithmetic works if the win rate stays high and losers are cut before reaching full size. It stops working when losses are allowed to hit maximum repeatedly.

When is the best time to open an iron condor?

When implied volatility is high relative to how much the index actually moves, and no major scheduled event sits before expiry. Rich premium plus a calm calendar is the condor's ideal weather; cheap premium before a budget or election is the opposite.

Related Strategies

This page is for education only. It is not investment advice, and nothing here is a recommendation to buy or sell any instrument. Options involve substantial risk, and option sellers can lose far more than the premium they receive. Please do your own research or consult a SEBI registered investment adviser before trading. Read our full disclaimer.

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