Iron Condor

An iron condor, in its credit or short form, combines a bull put spread at lower strikes with a bear call spread at higher strikes. It purchases the outer put and call and sells the two inner options, using equal quantities, matching contract sizes, and a common underlying and expiration. The net credit is the maximum expiration profit, while the purchased wings limit losses outside the four-strike range.

The short strikes are commonly placed on opposite sides of the current underlying price. Unlike the single profit peak of an iron butterfly, the condor has an interval of maximum expiration profit between its two short strikes. This interval does not remove the possibility of an early trading loss while the underlying remains inside it.

Construction and example

A hypothetical example uses SPY at $750 and options with 45 days remaining. One complete condor contains a standard 100-share contract in each leg:

Trade	Strike	Premium per share
Purchase one put	$700	$2.00 paid
Sell one put	$725	$6.50 received
Sell one call	$775	$8.50 received
Purchase one call	$800	$3.50 paid

The put spread receives $4.50 per share and the call spread receives $5. Their combined credit is $9.50 per share, or $950. The $1,500 received for the two short options exceeds the $550 paid for the outer options by that amount. Each spread has a $25 strike width and protects a different side of the position. The two wing widths are not added to calculate the expiration loss, because only one side can have an intrinsic-value obligation at a given final underlying price.

Expiration payoff

From $725 through $775 at expiration, all four options have zero payoff and the $950 credit is the maximum profit. Below $725, the short put’s intrinsic value reduces that profit. At $700, the purchased put begins offsetting each further increase in the short put’s obligation.

Above $775, the short call similarly creates an increasing obligation. At $800, the purchased call begins offsetting further increases. In either direction, the $9.50 per-share credit absorbs the first $9.50 of intrinsic value owed on the affected short option. The break-evens are therefore $715.50 and $784.50.

At or beyond either outer strike, the affected spread has a $25 per-share net obligation and the opposite spread has zero payoff. Subtracting the $950 opening credit from the $2,500 obligation gives a maximum loss of $1,550, or $15.50 per share.

The expiration result has a flat maximum in the center, declining sections within the two wings, and flat losses beyond the outer strikes.

Value before expiration

Closing the condor repurchases both short options and sells both purchased wings. A net closing debit of $6 per share costs $600 and realizes a $350 profit against the $950 opening credit. A closing cost greater than $9.50 per share realizes a loss.

With SPY between the short strikes and other inputs unchanged, passing time generally reduces the remaining option value and can lower the closing cost. Movement toward one short strike increases that side’s exposure. The opposite spread may become less expensive to close, but its improvement can be smaller than the adverse change in the spread approached by the underlying.

Near the center, higher implied volatility generally raises the cost of the possible movements represented by the short spreads. Farther toward or beyond a wing, the net response can differ. Put and call IVs also need not change together: during a decline, put-side repricing can increase the put spread’s cost more than the call spread’s cost falls. The early result depends on all four available option prices.

Exercise, assignment, and execution

SPY options permit early exercise. Assignment of the $725 put purchases 100 shares at that price, while the $700 put retains its sale right. Assignment of the $775 call sells 100 shares there, while the $800 call retains its purchase right. Each long option remains a separate contract requiring its own sale or exercise decision.

The corresponding wing can preserve protection after early assignment, but the account must support any resulting shares and financing or delivery requirements. Selling options and trading shares may recover remaining time value that exercise would not pay. At expiration near a wing, independent exercise decisions can leave shares after their option protection ends.

A complex closing order can trade the complete four-leg ratio at a net price. It closes only the quantity actually filled and does not resolve shares created by an earlier assignment. Unfilled condors remain exposed to their option obligations.

Payoff formulas

Order the strikes as $K_1<K_2<K_3<K_4$ . The purchased put is at $K_1$ , short put at $K_2$ , short call at $K_3$ , and purchased call at $K_4$ . With credit per share $c$ , final price $S_T$ , multiplier $M$ , and $q$ complete condors:

\text{P/L}=qM\bigl[c+\max(K_1-S_T,0)-\max(K_2-S_T,0)-\max(S_T-K_3,0)+\max(S_T-K_4,0)\bigr]

The purchased payoffs are added and the short obligations subtracted. For equal widths $w=K_2-K_1=K_4-K_3$ and $0<c<w$ :

\text{Maximum profit}=qMc,\qquad \text{Maximum loss}=qM(w-c)

\text{Break-evens}=K_2-c\quad\text{and}\quad K_3+c

For unequal wings, the lower and upper outer-region results are $qM[c-(K_2-K_1)]$ and $qM[c-(K_4-K_3)]$ respectively. A side has a break-even only when the credit does not exceed its width. Equality creates a zero-profit-or-loss outer region; a larger credit leaves that side profitable throughout. The complete maximum loss is the wider wing less the credit, multiplied by $qM$ , when that difference is positive.