Iron Condor
A 4-leg defined-risk strategy that profits from range-bound markets and IV contraction.
The iron condor combines a bull put spread and a bear call spread to create a defined-risk neutral strategy. You sell an OTM put and an OTM call while buying further OTM options as protection. It profits when the underlying stays between the two short strikes through expiry.
Strategy Structure
Sell 1 OTM Put + Buy 1 further OTM Put (bull put spread) + Sell 1 OTM Call + Buy 1 further OTM Call (bear call spread).
Profit & Loss Profile
Market Outlook
Neutral — expecting the underlying to stay within a range.
When to Use
- You want a neutral strategy with defined risk (capped max loss)
- You expect the market to stay range-bound
- IV is elevated and you want to sell premium with protection
- You prefer to know your max loss upfront
When to Avoid
- In strongly trending markets
- When IV is very low (small premiums relative to risk)
- Before major events that could cause large moves
- If the expected move is wider than your short strikes
Ideal Conditions
- High IV environment for better premium collection
- Range-bound market with clear support and resistance levels
- No major events during the holding period
- Enough time to expiry for theta decay (5-15 DTE)
Greeks Impact
Near-zero at entry. Becomes directional as the underlying approaches either short strike.
Negative gamma — risk increases as the underlying nears the short strikes. Less gamma risk than a straddle due to the protective wings.
Positive theta — time decay benefits the position. Maximum when underlying is centered between the short strikes.
Negative vega — benefits from IV contraction. The short strikes contribute more vega than the protective long strikes.
Nifty Example
Setup: Buy 22100 PE at ₹18, Sell 22200 PE at ₹30, Sell 22800 CE at ₹28, Buy 22900 CE at ₹15. Net premium = (30 - 18) + (28 - 15) = ₹25. Max loss per lot = (100 - 25) × 25 = ₹1,875. Max profit per lot = ₹25 × 25 = ₹625.
If profitable: If Nifty expires anywhere between 22200 and 22800, all options expire worthless (short strikes) or near-worthless, and you keep most or all of the ₹625 premium.
If loss: If Nifty drops to 22050, the put spread hits max loss. You lose (100 - 25) × 25 = ₹1,875 per lot.
Adjustments & Risk Management
- Roll the untested spread closer to collect more premium
- Close the tested spread early and leave the untested spread open
- Widen the wings on the tested side for more room
- Convert the tested side to a vertical spread at a better strike
- Close the entire position at 50% profit to reduce risk
Iron Condor vs Short Strangle
The iron condor is essentially a short strangle with protective wings. The trade-off is clear: you collect less premium (due to buying protection) but your max loss is capped. For Nifty weekly options, an iron condor might collect 30-50% less premium than a comparable strangle, but your worst-case scenario is defined.
Most professional traders prefer iron condors over naked strangles for overnight positions because gap risk is managed. Short strangles are more common for intraday or very short-term expiry plays.
Choosing Strike Distances
The width between your short and long strikes determines your risk-reward profile. Wider wings cost less (less protection premium) but have higher max loss. For Nifty, common wing widths are 100-200 points.
Place short strikes beyond the expected move. If the ATM straddle premium implies a ±300 point move, place your short strikes at least 300 points away. Placing them at 1.5x the expected move gives approximately a 70% probability of profit.
Related Strategies
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