How to Trade an Iron Condor
To trade an iron condor, sell a credit spread above the current price and another below it in the same expiry, collecting both credits. The position profits if price stays between the short strikes, and only one side can be tested, so the maximum loss is one spread's width minus the total credit.
An iron condor is a credit spread above the market and another below it, sold at the same time in the same expiry. It pays if price finishes between the two short strikes, and price can only breach one side, which is what caps the loss.
Before you start
A view that price stays inside a range, with both edges named. That is a real view and it requires reasons. It is not the same as having no opinion.
The maximum loss on one side, calculated before the order. One spread’s width, times the multiplier, minus the total credit from both sides.
Four liquid strikes in the same expiry, checked individually. The two protective legs are the ones people skip, and they are the ones that matter at exit.
The steps
1. Name both edges of the range
Where the short strikes go is the whole trade. Placing them by premium rather than by structure is the same error as choosing any entry by what it pays.
2. Build each side as a credit spread
Sell the near strike, buy the further one for protection. Same expiry throughout. The two protective legs are what convert this from an unlimited risk to a capped one.
3. Calculate the loss from one side only
Price finishes on one side or the other, never both. So the maximum loss is one width minus the combined credit, which is better than the two spreads considered separately.
4. Size from that figure
The number of condors is your risk figure divided by the maximum loss. Sizing from the credit produces a position that is several times too large.
5. Check all four strikes trade
Closing the position needs all four to be tradeable. A dead protective leg means the structure cannot be unwound as designed, which is when a capped loss stops being capped in practice.
6. Place and close as one order
Legging into four contracts individually is four separate exposures at four separate moments. The combined order removes that and usually gets a better net price.
7. Close it before expiry week
Most of the credit is earned before the final week. Holding through it keeps full assignment risk on both short legs for the smallest remaining portion of the payment.
How to tell it worked
Both edges were named with reasons, before any strike was priced.
The maximum loss was written in currency, and position size came from it.
All 4 strikes traded on at least 1 of the last 5 days.
And the position was closed at least 5 days before expiry.
Why the loss is one side, not two
At expiry price sits somewhere, and that somewhere is either above, below or between. It cannot be above your call strikes and below your put strikes at the same time, so only one spread can finish in the money.
This is also why the costs are heavy. Eight legs across entry and exit, each paying part of a spread, all deducted from a credit that is the entire upside.
The adjustment trap
When one side is tested, the obvious move is to roll it further away. That collects more credit and moves the strike, and it usually widens the position or extends the expiry.
Both of those increase the maximum loss. The trade that was capped at one width is now capped at a larger one, and the reason it was adjusted is that the original view had already been wrong.
The honest alternative is closing the tested side and keeping the other. It records a loss, which is the thing the adjustment exists to postpone, and it leaves the maximum exposure where you set it.
What kind of market it needs
A range with edges that have already held. Two levels price has approached and failed to exceed give the short strikes something to sit behind, which is different from placing them where the premium looks acceptable.
Enough time for the range to hold and not so much that conditions change. A long expiry collects more credit and gives price far more opportunity to leave the range in either direction.
And a market whose expected movement is not being repriced upward. Credit is higher when the market expects larger moves, which is precisely when a range view is least likely to be correct — the extra payment is compensation for a worse bet, not a better one.
Which is why the position looks most attractive when it is least suitable. High credit and a wide range are the same market condition described from two directions.
The original data
Of the 24,971 unique videos in research/search-study-corpus.jsonl, 5 mention iron condors in the
title, at a median of 5,660 views across 5 channels, and 60% of those titles are instruction-shaped.
Credit spreads appear in 8 at 14,227 and options generally in 889 at 10,399. The counts come from
site/corpus_count.py.
5 videos at 5,660, the thinnest coverage and the smallest audience of the option structures measured here. A complicated position with four legs and eight transactions, taught less than any of its parts.
The answer to the question on that chart is that rolling up increases the capped loss. The position you sized was one width; the adjusted one is wider or longer or both. On this site’s series direction runs average 2.01 bars and the longest ran 11 — a tested side is an ordinary event, and the plan for it belonged in the trade before it was opened.
When it fails
The failure is the adjusted condor, and it turns a defined loss into an open-ended project. One side is tested, gets rolled out and away for a credit, and the position now runs longer with a wider cap. It gets tested again. Three adjustments later the maximum loss is several times what was originally sized for, the expiry is months away, and every adjustment was individually reasonable — while the total exposure was never re-authorised by anybody.
The second failure is calling it neutral. It is two directional claims.
A third is sizing from the credit. The credit is not the risk.
A fourth is unchecked protective legs. They are what caps the loss.
A fifth is legging in. Four separate fills is four separate exposures.
And a sixth is holding into expiry week. Two short legs, full assignment risk, minimal payment.
Related
Iron condor covers the structure in detail. Credit spread is one side of it, and easier to size. And trading range is the condition the whole position depends on.
The thing I had to unlearn is that this is a neutral position. It is two directional statements made at once — price will not exceed here, and it will not fall below there. Calling it neutral makes it sound like it needs nothing to be true, and it needs two things to be true.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.