The Iron Condor option strategy can be thought of as a limited-risk way to sell a strangle. The trade has a relatively high probability of a relatively small gain.

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Strategy: Condor

The Outlook: Neutral. Not expecting any dramatic movement up or down before the expiration of the options.

The Trade: For the trade graphed above, an "Iron" Condor, sell puts at one strike below the current stock price, buy puts one strike lower than that, AND sell calls one strike above the current stock price, and buy calls one strike higher than that.

Gains when: Stock stays between the strike prices sold.

Maximum Gain: On an "Iron" Condor, limited to the initial credit.

Loses when: Stock moves beyond one of the breakeven points.

Maximum Loss : Limited to the largest difference in strike prices on one side times the number of shares represented, less the initial credit.

Breakeven Calculation: (For an "Iron" Condor) Lower breakeven = put strike price - initial credit. Upper breakeven = call strike price + initial credit.

Advantages compared to stock: Increased leverage, much less capital required, "built-in" stop loss, can gain from no stock movement or limited stock movement, while still allowing for some bullish or bearish movement.

Disadvantages compared to stock: Risk of losing more than the initial credit.

Volatility: after entry, increasing implied volatility is negative.

Time: after entry, the passage of time is positive.

Margin Requirement : An "Iron" Condor can be thought of as a Bull Put plus a Bear Call, both of which require margin equal to the difference in the strike prices times the number of shares represented. Some brokers will require full margin as if both sides could lose ($1000 in the example), other brokers recognize that only one side can lose and therefore require half the margin ($500 in the example).

Variations: Use all calls or all puts. An "Iron" Condor is called Iron because it uses both puts and calls.

Comments

• A Condor trade is an "anti-gambler's trade". There is a very good chance of a small profit, and a very small chance of a large loss. If you manage the trade so that you only take relatively small losses and not the maximum possible loss, you increase your chances of coming out ahead over the long term.

• A Condor trade can be thought of as a safer alternative to selling a Strangle. Just selling a Strangle could expose you to unlimited losses. The long options that are part of the Condor trade serve to limit losses to a manageable amount, even if the stock moves unexpectedly beyond one of the breakeven points.

• Condor trades require a large commission expense. Entering the trade will cost four commissions, and if you need to exit early there will be another four commissions. If you do not use the lowest-commission discount option brokers, the Condor trade might not make much sense. With most brokers, using more contracts will result in lower per-leg commissions overall and might make the trade reasonable.

• Some traders set up a condor position and then try to "play the middle": on up days, they buy back the puts that have lost value, and sell calls if they are not currently short. On down days they buy back the calls that have lost value, and sell puts if they are not currently short. This is a game for volatile markets and it might work if the stock stays within a range. But the Condor is a trade that will lose if the stock starts trending one way or another, so it would not make sense if you expect any sort of a trend.

• The Condor strategy gets it's name from the graph. It reminded traders of a large bird with wings. Compare to the Butterfly graph, that looks like something smaller with wings.

Exits

• The Condor trade gains if the stock stays within the short strike prices and time passes. If the stock moves beyond one of the short strike prices at any time, the losses can multiply quickly up to the maximum possible. Using the graph at the top of the page, if the stock were to move to 45 or 55 at any time, it would be wise to cut the losses short at about $100, which is about a quarter of the maximum possible loss.

The graphs below show that the Condor strategy can be set up with all Calls or all Puts, and the graph is nearly identical to the "Iron" Condor. The main difference is the Iron Condor is entered for a credit, and these trades have an initial debit.