Iron Condor Explained - Selling a Range With Defined Risk

Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026

An iron condor is a four-leg options strategy that sells an out-of-the-money put spread and an out-of-the-money call spread on the same stock and expiration, collecting a credit that the trader keeps if the stock finishes between the two short strikes.

It is a bet on a range, not a direction. With XYZ at $50, the condor in this lesson keeps its full $84 credit anywhere from $45 to $55 at expiration and loses at most $416 if XYZ finishes below $40 or above $60. Because both sides are spreads, the worst case is known before you place the trade, which is what "defined risk" means.

How is an iron condor built?

Every iron condor has four options with the same expiration, from lowest strike to highest:

1. Buy a far out-of-the-money put (the lower wing).
2. Sell a closer out-of-the-money put (the short put).
3. Sell an out-of-the-money call (the short call).
4. Buy a farther out-of-the-money call (the upper wing).

Legs 1 and 2 form a bull put spread; legs 3 and 4 form a bear call spread. Each is a credit spread on its own, and the Vertical Spreads module of the Building a Strategy course covers them one at a time. An iron condor simply sells both at once. The short options collect premium; the long wings cost less and exist to cap the loss.

What are an iron condor's max profit, max loss and break-evens?

The same three formulas work for any iron condor with equal wings:

• Maximum profit = the net credit, kept if the stock finishes between the short strikes.
• Maximum loss = wing width - net credit, times 100, if the stock finishes beyond either long strike.
• Break-evens = short put strike - credit, and short call strike + credit.

Only one side can lose at expiration, because the stock cannot be below $40 and above $60 at the same time. That is why the maximum loss is one wing minus the whole credit, not two wings. It is also why brokers usually tie up only one side's risk: NASD's 2006 Notice to Members 06-26 (NASD is FINRA's predecessor) set the minimum requirement for a short iron condor at the exercise price interval (one wing, when the wings are equal), and lets the credit be applied against it, so the minimum for this condor works out to its $416 maximum loss. FINRA Rule 4210 today treats a condor as a spread margined at no more than its maximum potential loss, with the credit applied, which gives the same $416. Brokers can set a higher house requirement, and they require a spread approval level before you can trade one, so check your broker's margin schedule.

The Options Industry Council's short condor (iron condor) page gives the same profit, loss and break-even formulas.

What is an iron condor really betting on?

An iron condor is short volatility and long time. It profits when the stock moves less than the market priced in, and the Greeks show it:

• Theta is positive. Each day that passes with XYZ near $50 is worth about $2.16 to the position in the model, because the short options lose value faster than the cheaper wings.
• Vega is negative. A one-point rise in implied volatility costs about $6.43 before expiration, even if XYZ does not move. A volatility spike can show a loss on a stock that is still inside the range.
• Delta is close to zero. The position barely cares about a small move, but that changes as the stock nears a short strike, which Managing an Iron Condor covers.

The trade-off is the shape of the payoff. You collect $84 for risking $416, so one full loss erases about five full wins. In the calculator's model, XYZ has about a 66% chance of finishing between $45 and $55 (full profit) and about a 73% chance of finishing between the break-evens (any profit). Those are model estimates that assume the 30% volatility is right, not forecasts, and they are the reason the credit is small: the more likely the outcome, the less the market pays you for it.

What can go wrong with an iron condor?

• A large move. Earnings, news or a market selloff can carry the stock through a short strike and then through a wing.
• Early assignment. Any short option can be assigned before expiration, most often a short call just before an ex-dividend date or an option deep in the money. The OIC's assignment FAQ explains when the risk rises.
• Expiration near a short strike. If the stock closes near a short strike on the last day, you may not know whether you will be assigned. Managing an Iron Condor walks through that case.
• Costs. Four legs means four commissions (where your broker charges them) and four bid-ask spreads to cross on the way in and again on the way out.