Iron condor

Definition

An iron condor combines a bear call spread above the market and a bull put spread below it, same expiry: four legs, two credits, and a defined-risk range thesis — the underlying stays between the two short strikes through expiration. It is the canonical “range + rich premium” structure: short volatility with both tails capped.

How it works / structure

• Legs: −1 call K3 / +1 call K4 above; −1 put K2 / +1 put K1 below (K1 < K2 < spot < K3 < K4), same expiry.
• Credit: total credit C; maximum loss = wider wing width − C (one side can lose at expiry, not both); breakevens K2 − C and K3 + C.
• Parameters (engine-executable): short-strike deltas (commonly 0.10-0.25 per side) or placement relative to the expected move (expected_move_pct — e.g. short strikes at 1.0- 1.5× the priced move), wing widths, DTE (commonly 30-60 at entry), IV gate (iv_rank), management (mgmt-profit-target at x% of credit, mgmt-stop-loss at multiple of credit, mgmt-rolling the tested side, mgmt-time-based-exit at a DTE floor before the expiry gamma zone).
• Greeks profile: near-zero delta at entry, short vega, positive theta — long quiet, short movement and volatility.

When it applies

Range theses on liquid underlyings (“X stays inside ±M% through expiry”), elevated-IV entries where the priced move looks wide relative to the thesis (opt-expected-move vs expected realized), and post-event IV normalization windows. Requires four-leg liquidity — thin chains make the structure’s friction prohibitive (ms-bid-ask-spread).

Risk profile & failure modes

• Loss clustering: condors lose in trending and shock regimes, which arrive in clusters (regime-volatility) — sequential max losses after months of small wins is the documented shape of failure, not an anomaly.
• Payoff-ratio arithmetic: typical builds risk 2-4x the credit; the required win rate leaves thin margin for regime error.
• Tested-side management is the strategy: unmanaged condors through a strike breach realize disproportionate losses; the management rules are not optional accessories, they are most of the realized distribution.
• Four-leg friction: entry, adjustment, and exit each pay four spreads; overtrading management rules can consume the credit (ms-slippage-friction).

Evidence & limits

Mechanics are contract arithmetic (OCC). The strategy monetizes the volatility risk premium — average IV richness over realized (Bakshi-Kapadia 2003 for the index evidence) — which is real on average, time-varying, and violently negative in shocks. No public study establishes iron condors as reliable standalone income; “high-probability trade” framing that ignores the payoff ratio is folklore and labeled as such.

Falsifiable-thesis examples

Illustrations only, not signals:

• “X will close between K2 and K3 at expiry” — falsified by a close outside the short strikes.
• “X’s realized move over the position’s life will be less than the entry expected move” — falsified by |realized| ≥ implied.
• “A 0.16-delta, 45-DTE condor program on Y, managed at 50% profit / 2x-credit loss, will show positive P&L over the next two quarters in replay” — falsified by the replay result.

Cross-references

• Components: strategy-bear-call-spread, strategy-bull-put-spread
• Siblings: strategy-iron-butterfly (strikes pinched to center), strategy-strangle (wings removed — undefined risk)
• Placement math: opt-expected-move, opt-iv-rank-percentile
• Management: mgmt-profit-target, mgmt-stop-loss, mgmt-rolling, mgmt-time-based-exit