How do I construct an iron condor and when does it work best?

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AcadiFi · Accepted Answer

An iron condor is four options: sell an OTM put, buy a further-OTM put, sell an OTM call, buy a further-OTM call — all same expiration. For Silverlake Utility at $80:

- Sell $76 put for $1.10
- Buy $74 put for $0.60
- Sell $84 call for $1.00
- Buy $86 call for $0.55

Net credit = $1.10 - $0.60 + $1.00 - $0.55 = $0.95 per share, or $95 per contract. Maximum profit is the credit ($95) if Silverlake closes between $76 and $84 at expiration. Maximum loss is the wing width minus the credit: ($2.00 - $0.95) = $1.05, or $105 per contract. Risk-to-reward is roughly 1.1:1.

Breakevens are $76 - $0.95 = $75.05 and $84 + $0.95 = $84.95. The stock can move ±6% and you still profit.

The iron condor is short vega, short gamma, positive theta — you're essentially betting that realized volatility will be less than implied volatility. It works best on low-beta, range-bound underlyings (utilities, REITs) during low-volatility regimes. Avoid entering before earnings or major catalysts. On the CFA exam, the iron condor is often presented as a defined-risk alternative to selling naked strangles: you sacrifice premium for capped downside.

How do I construct an iron condor and when does it work best?

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