You may consider a short iron condor when you expect an underlying asset will move in a certain price range and want to limit risk.

Construction of the strategy

A short iron condor strategy involves trading four options of the same underlying asset.

● Buy a put1

● Sell a put2

● Sell a call1

● Buy a call2

Put1, put2, call1and call2 have the same expiration date but different strike prices.

Strike price: put1<put2<call1<call2, and put2-put1="call2-call1</p"></put2<call1<call2,>

Brief description

Generally, a short iron condor strategy consists of buying a put with the lowest strike, selling another put with the second lowest strike, selling a call with the second highest strike, and buying another call with the highest strike.

The distance between the puts is equal to that of the calls. All options have the same expiration date.

A Short Iron Condor is also a combination of two strategies: a bear call spread and a bull put spread, or a long strangle and a short strangle.

This strategy potentially has limited maximum profit and limited risk before the contracts expire.

You can potentially get the maximum profit if the asset price range is between the second lowest and second highest strikes. A wider distance between these two strikes potentially increases the probability of getting the maximum profit, but at the same time, the maximum loss will become higher.

A short Iron condor has a similar profit-loss pattern to the short call/put condor strategies. The major difference is that the short iron condor is a net credit strategy, while the short call/put condor strategies are net debit strategies.

When using this strategy, you should pay attention to the cost (including commissions) because it includes at least four option trades. It is important to ensure a favorable risk/reward ratio.

Gain & Loss  

● Breakeven

Upside Breakeven = Second Highest Call Strike + Net Premium Received.

Downside Breakeven = Second Lowest Put Strike - Net Premiums Received.

● Max gain

Net premium received

● Max loss

Max loss = Highest Call Strike – Second Highest Call Strike - Net Premium Paid

Example

Suppose a theoretical stock called TUTU on Nasdaq is currently trading at $52.

You expect it will very likely move between $50 and $54. So you use a short iron condor:

● Buy a $1 TUTU put with a strike of $46

● Sell a $2 TUTU put with a strike of $50

● Sell a $2 TUTU call with a strike of $52

● Buy a $1 TUTU call with a strike of $56

(The following calculations do not include transaction costs.）