An iron condor is an options strategy that uses four options on the same underlying asset with the same expiry date. The trader sells a call and a put slightly out of the money, then buys cheaper call and put options further out to limit losses. It profits when the price stays between the sold strikes until expiry, and its maximum gain is the net premium received when the position is opened.
What are the four legs of an iron condor?
An option is a contract that gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a fixed price, called the strike price, before or on a set date. The asset underneath the contract is the underlying. The expiry is the date on which the contract ends.
An option is out of the money when exercising it would not make money at the current price. An iron condor has four legs: a short call and a short put, which are sold slightly out of the money, and a long call and a long put, which are bought further out of the money. The trader receives money for the options sold and pays a smaller amount for the options bought.
How is an iron condor built from two credit spreads?
A credit spread is a pair of options of the same type, one sold and one bought, where the sold option is worth more and so the trader receives a net credit. An iron condor combines two of them. The first is a bear call spread, made of the short call and the further-out long call. The second is a bull put spread, made of the short put and the further-out long put.
Each spread has a fixed maximum loss, which is the gap between the two strikes minus the credit received. Putting both spreads together gives one position with defined limits on both sides.
When does an iron condor make money?
An iron condor is a neutral strategy, meaning it does not need the price to rise or fall. It is range-bound, meaning it is designed for a price that stays in a band. It profits when the underlying remains between the two inner strikes, the sold call and sold put, until expiry.
Its maximum profit is the net credit received when the trade is opened. If the price is inside the sold strikes at expiry, all four options expire worthless and the trader keeps the whole credit. Most iron condors are set up this way, as short positions that bring in cash upfront, rather than as long positions that require paying a net debit.
Worked example: how the numbers look (hypothetical)
Suppose a stock is priced at ₹500 per share, and this example is invented for illustration only. A trader sells a ₹540 call and receives ₹12 per share, buys a ₹560 call for ₹4, sells a ₹460 put for ₹11, and buys a ₹440 put for ₹9.
The net credit is (12 + 11) − (4 + 9) = ₹10 per share. If the stock closes between ₹460 and ₹540 at expiry, the maximum profit is ₹10 per share. The gap between strikes on each side is ₹20, so the maximum loss is ₹20 − ₹10 = ₹10 per share, reached only if the price moves beyond ₹560 or below ₹440.
How do the long legs limit losses?
Without the long options, a short call has theoretically unlimited loss if the price rises sharply, and a short put can lose heavily if the price falls sharply. The long call and long put cap these losses. Using the example above, if the stock jumped to ₹600 at expiry, the sold ₹540 call would lose ₹60, but the bought ₹560 call would recover ₹40, so the net loss on that side is ₹20, less the ₹10 credit.
What role do volatility and time decay play?
Volatility is the degree to which a price swings over time, and it strongly affects option prices. Time decay is the steady loss of an option’s value as its expiry approaches, which works in the seller’s favour. An iron condor performs best when volatility falls and time decay erodes the sold options.
Sudden volatility spikes can hurt the position. A jump in volatility raises the price of all options, including the ones sold, so buying back the position costs more even before the price reaches a strike.
What are the catches?
The first catch is the ratio of reward to risk. In the example, the trader keeps ₹10 per share at best and can lose ₹10 per share at worst, while the credit is only half the width of the spreads. Several small gains can be wiped out by one large loss.
The second catch is that the profit zone is narrow in practice. A price that drifts just past a short strike turns a profitable trade into a loss that grows toward the maximum. Brokerage charges and taxes on each leg also reduce the net result, and these costs are easy to overlook when the credit looks small.
Sources and last check
Facts in this article were checked against the sources below on 1 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- zerodha.com (broker education)
- icicidirect.com (broker education)
- kotakneo.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.
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