Iron condor

An iron condor is a four-option trade that profits when the price stays inside a range. It is built from two credit spreads at once:

• A bull put spread below the price: sell a put, buy a lower put.
• A bear call spread above the price: sell a call, buy a higher call.

All four options have the same expiry. You collect premium on both sides, and you keep it all if the price at expiry finishes between the two sold strikes. The bought options on the outside cap the loss if the price breaks out of the range. In effect it is a short strangle with protection added on both wings.

How the payoff works

• Between the sold strikes: all four options expire worthless. You keep the whole credit.
• Between a sold strike and its bought strike: one side is losing. Profit shrinks and turns into a loss past the breakeven.
• Beyond either bought strike: the loss is capped at its maximum.

Only one side can lose at expiry, because the price cannot be both above the calls and below the puts. That is why margin for an iron condor is normally set for one side, not both; check how your broker treats it.

Max profit = total credit · Max loss = spread width − total credit

Lower breakeven = sold put − credit · Upper breakeven = sold call + credit

A worked NIFTY example

NIFTY is at 25,000. You expect it to stay roughly between 24,700 and 25,300 until expiry. You place four orders:

Each spread is 200 points wide. Maximum profit = ₹48. Maximum loss = 200 − 48 = ₹152. Breakevens are 24,700 − 48 = 24,652 and 25,300 + 48 = 25,348.

With a lot of 75 units (check the current lot size on NSE or with your broker), the trade could earn ₹3,600 or lose ₹11,400. The profitable zone is about 700 points wide, but the reward is less than a third of the risk.

Live example: is the range realistic?

The single most useful check is the market's own expected move to expiry, worked out from the at-the-money straddle:

If your sold strikes sit outside this range, you are betting that NIFTY stays within what the market sees as a normal week; if they sit inside it, you collect more credit but the market already expects the price to reach them. The expected move guide explains how the range is calculated.

Whether premiums are rich or thin matters just as much, since the condor is a bet that volatility will be lower than priced:

A high IV rank means premiums are large compared with the past year, which gives a wider profitable range for the same credit. A low rank means thin premiums and little cushion. See IV rank and IV percentile.

Choosing strikes and wing width

• Sold strikes: often placed near or just beyond the expected move, or at strong open interest levels (largest put OI below, largest call OI above).
• Wing width (distance to the bought options): wider wings collect more credit but raise the maximum loss; narrower wings cost more protection and lower the credit.
• Balance: a condor does not have to be symmetric. If you lean slightly bullish, place the put side further away and the call side closer.
• Expiry: weekly condors decay quickly but leave little time to recover from a move; monthly condors give more room but tie up margin longer.

Build and adjust all four legs in the strategy builder to see both breakevens and the maximum loss before placing anything.

How it behaves before expiry

An iron condor is short volatility and long time. Each quiet day adds a little to the profit as all four options decay. A sharp move or a rise in implied volatility makes the condor more expensive to close, even if the price is still inside the range. Early in the trade, a move toward one sold strike can show a paper loss larger than you expect, because the options still carry plenty of time value.

Iron condor vs short strangle

Remove the two bought options and an iron condor becomes a short strangle: sell an out-of-the-money put and call and keep the full premium. The strangle collects more, because nothing is spent on protection, and its profit zone is a little wider. But its loss has no limit on either side, and the margin is far larger. The condor gives up part of the credit to make the worst case known in advance and to cut the margin to roughly the maximum loss.

For a trader with a small account, that known worst case is the main attraction: one bad gap cannot cost more than the planned amount. The short strangle guide covers the unhedged version and its risks.

Adjustments

Traders who manage condors actively use a few standard moves when the price heads toward one side:

• Roll the untested side closer: if NIFTY rises toward the call side, close the put spread and sell a new one higher. This collects more credit and widens the cushion on the call side, but narrows the range.
• Close the tested side: take the loss on the threatened spread and keep the other side running.
• Close everything at a set loss, for example when the condor costs twice the original credit.
• Take profit early: many traders close once half or more of the credit is earned, rather than holding the last few rupees through expiry-day risk.

Every adjustment costs charges and often adds risk. A plan written before entry beats a decision made under pressure.

Common mistakes

• Judging by the win rate. Many small wins can be erased by one full loss.
• Selling too close for more credit. The range becomes narrow and is often breached.
• Holding through events such as RBI policy, the budget or election results.
• Legging in one side at a time and being caught with only a short spread in a fast market.
• Ignoring costs. Four legs to open and four to close; fees take a large share of a small credit.
• Stock condors held to expiry, which can trigger physical delivery.