Definition
An iron condor is a four-leg options structure that profits when the underlying stock or index stays within a defined price range through expiration. The position is built by combining two credit spreads on opposite sides of the current price:
- Short put spread below the market: sell an out-of-the-money put, buy a further-out-of-the-money put.
- Short call spread above the market: sell an out-of-the-money call, buy a further-out-of-the-money call.
All four legs share the same expiration date. The two short strikes form the "wings" — the boundary within which the trade is fully profitable. The two long strikes serve as defined-risk hedges, capping the maximum loss on each side. The trader collects a net credit upfront and keeps the full credit if the underlying expires anywhere between the two short strikes.
The structure is market-neutral in direction (no view on whether the stock rises or falls) but directional in volatility — the trader is short volatility and short time. Iron condors thrive on stocks and indices that grind sideways or oscillate within a range; they bleed when volatility expands or the underlying breaks decisively in either direction.