How does an iron condor generate profit, and what are the breakeven points?

An iron condor combines a bull put spread (sell higher-strike put, buy lower-strike put) with a bear call spread (sell lower-strike call, buy higher-strike call) to profit from low volatility. The trader collects net premium and profits if the underlying stays within the short strikes at expiration.\n\nConstruction:\n\n`mermaid\ngraph LR\n A[\"Leg 1: Buy Put K1
(lowest strike)\"] --> B[\"Leg 2: Sell Put K2
(below current price)\"]\n B --> C[\"Underlying Price
(current)\"]\n C --> D[\"Leg 3: Sell Call K3
(above current price)\"]\n D --> E[\"Leg 4: Buy Call K4
(highest strike)\"]\n`\n\nWorked Example:\n\nNoverra Biotech trades at $85. Trader Priya constructs an iron condor expiring in 45 days:\n\n| Leg | Strike | Premium | Action |\n|---|---|---|---|\n| Buy put | $70 | -$0.80 | Protection |\n| Sell put | $75 | +$2.15 | Income |\n| Sell call | $95 | +$1.90 | Income |\n| Buy call | $100 | -$0.65 | Protection |\n\nNet premium received: $2.15 + $1.90 - $0.80 - $0.65 = $2.60 per share\n\nMaximum Profit:\nOccurs when the stock stays between the two short strikes ($75 and $95) at expiration. All options expire worthless (or the short options expire worthless while long options are even further OTM).\n\nMax profit = Net premium = $2.60 per share ($260 per contract)\n\nMaximum Loss:\nOccurs when the stock moves beyond either long strike ($70 or $100).\n\nMax loss = Width of either spread - Net premium\n= ($75 - $70) - $2.60 = $5.00 - $2.60 = $2.40 per share ($240 per contract)\n\nNote: Both spreads have equal width ($5), which is the standard construction. If widths differ, use the wider spread for max loss.\n\nBreakeven Points:\n\nLower breakeven = Short put strike - Net premium = $75 - $2.60 = $72.40\nUpper breakeven = Short call strike + Net premium = $95 + $2.60 = $97.60\n\nPriya profits as long as Noverra stays between $72.40 and $97.60 at expiration — a range of $25.20 centered around the current price.\n\nRisk-Reward Ratio:\nMax profit / Max loss = $2.60 / $2.40 = 1.08x\n\nThis is an unusually favorable ratio. Typically, iron condors have a risk-reward below 1.0, meaning the probability of profit compensates for the larger potential loss.\n\nWhen to Use:\n- Low implied volatility environment (or when you expect IV to decline)\n- Range-bound markets with clear support and resistance levels\n- When you want defined risk on both sides (unlike a naked strangle)\n\nKey Risk: A sharp directional move or volatility spike can push the underlying past a breakeven, creating losses that accelerate as the stock approaches the long strike.\n\nExplore advanced multi-leg strategies in our CFA Derivatives course.