An iron condor is a four-legged options strategy that profits from low realised volatility — the underlying staying within a defined range. It is constructed by selling an out-of-the-money call spread AND an out-of-the-money put spread on the same expiry. The trader receives a net credit upfront.
Structure: Sell OTM call (strike A) + buy further-OTM call (strike B) = bear call spread. Sell OTM put (strike C) + buy further-OTM put (strike D) = bull put spread. Strike order from low to high: D < C < A < B. Maximum profit = net credit received (achieved if underlying expires between C and A). Maximum loss = (B − A) or (C − D), whichever wider, minus net credit.
Iron condors are short-volatility, short-gamma trades. They print money in calm markets and lose money in sudden moves. They are popular as a monthly income strategy on indices.
Example 1: Nifty at 24,000. Trader sells 24,500 call for 60, buys 24,700 call for 25 (call spread credit 35). Sells 23,500 put for 55, buys 23,300 put for 25 (put spread credit 30). Total net credit = 65 points. Max profit = 65 if Nifty closes between 23,500 and 24,500. Max loss = 200 − 65 = 135 if Nifty closes above 24,700 or below 23,300.
Example 2: A trader runs a weekly iron condor on Bank Nifty as an income overlay. Wins about 70% of weeks but the losing weeks (when Bank Nifty breaks range) can wipe out 2-3 winning weeks. Risk-adjusted return depends heavily on position sizing and adjustments.
The most common iron-condor mistake — not sizing for the rare large loss. Cumulative small wins encourage overleverage; one gap day deletes a year of credits.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not recommend specific options trades. Iron condors carry tail risk that exceeds the visible reward.