Iron Condor: Profit Calculator and Payoff Visualizer

What Is an Iron Condor?

An iron condor is a limited-risk, limited-reward options trading strategy involving four options contracts: two calls and two puts. 

The iron condor can be considered a combination of a vertical call spread and a vertical put spread, built to profit based on specific price movements (or lack of) in the underlying asset. To be a true iron condor, the width of the call spread and the put spread must be the same.

You can both buy and sell iron condors:

• Long iron condors profit from high volatility
• Short iron condors profit from low volatility

Let’s next break down each of these strategies individually.

Long Iron Condor Explained

A long iron condor is a net debit strategy designed to profit from high volatility and considerable price movement outside a defined range. The trade is constructed with the following options:

Iron Condor Components:

• Buy 1 closer-to-the-money put
• Sell 1 farther out-of-the-money put
• Sell 1 farther out-of-the-money call ‍
• Buy 1 closer-to-the-money call

Long Iron Condor Payoff Calculations

Below are the key payoff metrics for the long iron condor trade:

Long Iron Condor Max Profit

• Calculation: (Width of one spread × 100) - Net debit paid
• Explanation: The maximum profit is achieved when the underlying asset's price is either above the higher sold call or below the lower sold put at expiration. 

Long Iron Condor Max Loss

• Calculation: Net debit paid
• Explanation: The maximum loss is limited to the initial net debit paid.

Long Iron Condor Breakeven Points

• Upper Breakeven Calculation: Long Call Strike + Net Debit Paid
  • Explanation: The underlying asset must rise above this level for the trade to start profiting.
• Lower Breakeven Calculation: Long Put Strike - Net Debit Paid‍
  • Explanation: The underlying asset must drop below this level for the trade to start profiting.

Long Iron Condor Trade Example

Let’s say a stock is trading at $100. You think the stock will move a lot but aren’t sure which direction. So, you decide to buy both calls and puts:

• Buy a 105 call for $2
• Buy a 95 put for $2

This trade is called a long straddle. Here’s what the payoff diagram looks like:

While long straddles offer unlimited profit potential, they are very expensive and put a lot of option premium at risk. They also require significant moves in the underlying to break even, as shown in the above diagram. 

What if you were willing to give up some upside profit to reduce the cost of your trade?

Reducing the High Debit

To lower the cost of this trade, you can sell additional options farther out of the money:

• Sell a 110 call for $1
• Sell an 90 put for $1

By doing this, you take in $2 ($200) in premium, reducing your total trade cost (and money at risk) to $2 ($200 per contract).

Long Iron Condor Created

Now, instead of a long straddle, you’ve created a long iron condor, a lower-risk, lower-reward trade compared to our straddle.

• Maximum Risk: The net debit paid, $2 ($200).
• Maximum Profit: The difference between the inner and outer strikes ($5 or $500) minus the debit paid ($2), giving you a maximum profit of $3 ($300).

Here’s how our long iron condor looks on a chart:

Notice how the wings of the chart both level out at the $90 and $110 price range. This demonstrates the trade’s maximum upside. Regardless of whether the underlying asset triples in value or drops to zero, your maximum profit remains $300. For every dollar gained on the outer long options, an equal loss occurs on the short options, neutralizing any additional profits.

Short Iron Condor Explained

Short Iron Condor Explained

A short iron condor is a net credit strategy designed to profit from low volatility when the underlying asset price stays within a defined range. The trade is constructed with the following options:

Short Iron Condor Components:

• Sell 1 closer-to-the-money put (short put)
• Buy 1 farther out-of-the-money put (long put)
• Sell 1 closer-to-the-money call (short call)
• Buy 1 farther out-of-the-money call (long call)

Short Iron Condor Payoff Calculations

Below are the key payoff metrics for the short iron condor trade:

Short Iron Condor Max Profit

• Calculation: Net credit received
• Explanation: The maximum profit occurs when the underlying asset’s price remains within the range defined by the two sold options at expiration. 

Short Iron Condor Max Loss

• Calculation: (Width of one spread × 100) - Net credit received
• Explanation: The maximum loss is incurred if the underlying asset’s price moves beyond the outer strikes.

Short Iron Condor Breakeven Points

• Upper Breakeven Calculation: Strike price of the short call + Net credit received
  • Explanation: The underlying asset must stay below this level to avoid losses on the upside.
• Lower Breakeven Calculation: Strike price of the short put - Net credit received‍
  • Explanation: The underlying asset must stay above this level to avoid losses on the downside.

Short Iron Condor Trade Example

Let’s say a stock is trading at $100. You expect the stock to stay relatively stable so decide to sell both a put and call option in the same option expiration cycle. You locate the options on your options chain and hit send:

• Sell a 105 call for $2
• Sell a 95 put for $2

This setup is called a short straddle, and the payoff for our trade can be seen below.

The downward line on the right side of the above chart represents the infinite risk of being naked short a call option. Similarly, the short put introduces significant downside risk since, in theory, the underlying stock or asset can drop to zero.

Reducing the High Risk

To limit the risk of the short straddle, you can buy additional options farther out of the money:

• Buy a 110 call for $1
• Buy a 90 put for $1

This approach reduces your risk but sacrifices some of the premium collected. Your total credit is now reduced to $2 ($200 per contract).

Short Iron Condor Created

Now, instead of a short straddle, you’ve created a short iron condor, a lower-risk, lower-reward trade compared to the straddle.

• Maximum Risk: The difference between the inner and outer strike prices (5) minus the net credit received ($2), giving you a maximum risk of $3 ($300).
• Maximum Profit: The net credit received, $2 ($200 per contract).

Here’s how our new short iron condor looks on a chart:

Notice how the chart levels off within the $90 to $100 range, showing the capped maximum profit. The trade does best when the stock price stays within this range, allowing all options to expire worthless.

However, if the price moves beyond $110 or below $90, your losses are limited to $300 per contract. The short iron condor balances lower risk with a steady reward, making it ideal for range-bound markets.

Iron Condors and the Greeks

Here’s the relationship between the Greeks (delta, gamma, theta) and both long and short iron condors:

Managing Iron Condors

The iron condor strategy consists of four options, meaning there’s much to monitor. Effective management is key to maximizing profits. Here are a few tips to get you started:

• Watch for Assignment: As expiration approaches, the assignment risk increases if an option is in the money and/or primarily comprised of intrinsic value. For American-style options (stocks and ETFs), dividends can also trigger early assignment on short options. Assignment can throw off the entire dynamic of an iron condor, so it’s crucial to keep a close eye on your positions.
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• Manage Pin Risk: If any of your options (long or short) are in the money by even a penny at expiration, you face assignment/auto-exercise risk. If both legs are safely in the money, they will likely be assigned and exercised, neutralizing your position. However, if only one leg is in the money, you face directional risk if assigned or auto-exercised, potentially leaving you with an unintended stock position
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• Leverage Time Decay: For short iron condors, time decay accelerates as expiration approaches. Professional option sellers often target options with around 45 days to expiration (DTE). Adjusting your position to this timeframe can help maximize profits by capitalizing on the rapid decay of option premiums.
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• Maintain Spread Width: When you adjust the options in an iron condor, maintain the initial spread width. If not, your risk level and margin requirements may increase. 

Explore Iron Condors in Virtual Trading!

With TradingBlock’s Virtual Trading platform, you can trade options in a simulated environment. Check it out below today!

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⚠️ When trading iron condors, effective risk management is crucial. Beyond the premium received or debit paid, remember to account for commissions and fees, as they can significantly impact your net profit or loss, particularly with iron condors which are four-legged trades. Always factor these costs into your trading strategy. Be sure to read Characteristics and Risks of Standardized Options before trading options.