Last updated on May 9th, 2022 , 05:16 am
The long iron condor is an options strategy that consists of simultaneously buying an out-of-the-money call spread and put spread on a stock in the same expiration cycle.
Since the purchase of a call spread is a bullish strategy, and buying a put spread is a bearish strategy, a long iron condor isn’t technically a directional position.
However, even though a long iron condor isn’t directionally specific (bullish or bearish), the strategy requires movement in the stock price or an increase in implied volatility to profit.
The long iron condor strategy is very similar to the long strangle, except an iron condor has less risk due to using spreads as opposed to naked options.
TAKEAWAYS
- A long iron condor consists of buying a put spread and a call spread at the same time.
- Both of these spreads must be of the same width and expiration.
- Long iron condor’s profit when the options bought rise in value.
- Long iron condors are best suited for directional traders who expect either upside or downside moves.
Long Iron Condor Characteristics
Here are the strategy’s general characteristics:
➥Max Profit Potential: (Width of Wider Spread – Debit Paid) x 100
➥Max Loss Potential: Debit Paid x 100
➥Expiration Breakevens
1. Upper Breakeven = Long Call Strike Price + Debit Paid
2. Lower Breakeven = Long Put Strike Price – Debit Paid
To further examine these characteristics, let’s take a look at a basic example.
Care to watch the video instead? Check it out below!
Long Iron Condor Profit/Loss Potential at Expiration
In the following example, we’ll construct a long iron condor from the following option chain:
In this case, we’ll buy the 450 put and the 550 call, and sell the 400 put and 600 call. Let’s also assume the stock price is trading for $500 when entering the position:
• Initial Stock Price: $500
• Short Strikes: $400 short put, $600 short call
• Long Strikes: $450 long put, $550 long call
• Credit Received From Short Options: $0.72 (400 put) + $1.94 (600 call) = $2.66
• Debit Paid for Long Options: $6.15 (450 put) + $7.89 (550 call) = $14.04
• Total Debit Paid: $14.04 Debit Paid – $2.66 Credit Received = $11.38
The following visual describes this position’s potential profits and losses at expiration.
Long Iron Condor at Expiration
As illustrated here, a long iron condor’s profit potential lies outside of the long strike of the trade, which means the stock price must increase or decrease for the position to be profitable at expiration. Regarding losses, a long iron condor realizes the maximum loss potential when the stock price does not trade beyond the long strikes by expiration.
Below explains the performance of this position based on various scenarios at expiration:
➥Stock Price Below the Short Put Strike ($400) -OR- Above the Short Call Strike ($600):
One of the spreads of the iron condor expires fully in-the-money. With spreads strikes that are $50 wide, the iron condor would be worth $50. With an initial purchase price of $11.38, the long iron condor trader realizes the maximum profit of $3,862: ($50 iron condor expiration value – $11.38 purchase price) x 100 = +$3,862.
➥Stock Price Between the Short Put Strike ($400) and the Lower Breakeven Price ($438.62):
The long 450 put expires with more intrinsic value than the initial $11.38 purchase price of the iron condor. As a result, the trader realizes profits.
➥Stock Price Between the Lower Breakeven Price ($438.62) and the Long Put Strike ($450):
The long 450 put expires with less value than the initial $11.38 iron condor purchase price. As a result, the position realizes a partial loss.
➥Stock Price Between the Long Put Strike ($450) and the Long Call Strike ($550):
All of the iron condor’s options expire worthless, resulting in the maximum loss of $1,138: ($0 iron condor expiration value – $11.38 purchase price) x 100 = -$1,138.
➥Stock Price Between the Long Call Strike ($550) and the Upper Breakeven Price ($561.38):
The long 550 call has intrinsic value, but not more than the initial $11.38 iron condor purchase price. Because of this, the position is not profitable.
➥Stock Price Between the Upper Breakeven Price ($561.38) and the Short Call Strike ($600):
The long 550 call expires worth more than $11.38, which is the initial purchase price of the iron condor. As a result, the position is profitable.
Nice job! You’ve learned the general characteristics of the long iron condor strategy. Now, let’s go through some visual trade examples to see how the strategy performs over time.
Long Iron Condor Trade Examples
In this section, we’re going to visualize the performance of long iron condors over time. Each example uses the prices of options that recently traded in the market. Note that we don’t specify the underlying, since the same concepts apply to iron condors on any stock. Additionally, each example demonstrates the performance of a single iron condor position. When trading more contracts, the profits and losses in each case will be magnified by the number of iron condors traded.
Trade Example #1: Partial Loss on an Iron Condor Purchase
In this first example, we’ll look at a scenario where a trader realizes a partial loss after buying an iron condor.
Here are the trade details:
• Initial Stock Price: $202.31
• Strikes and Expiration: Long 196 Put and 208 Call; Short 182 Put and 215 Call; All options expiring in 72 days
• Premium Paid for Long Options: $4.18 for the 196 put + $2.82 for the 208 call = $7.00 in premium paid
• Premium Collected for Short Options: $1.79 for the 182 put + $0.78 for the 215 call = $2.57 in premium collected
• Net Debit (Price Paid): $7.00 premium paid – $2.57 premium collected = $4.43 net debit
• Breakeven Prices: $191.57 and $212.43 ($196 – $4.43 and $208 + $4.43)
• Maximum Profit Potential (Upside): ($7-wide call spread – $4.43 debit) x 100 = $257
• Maximum Profit Potential (Downside): ($14-wide put spread – $4.43 debit) x 100 = $957
• Maximum Loss Potential: $4.43 net debit x 100 = $443
As mentioned earlier, the maximum profit potential of an iron condor depends on the wider spread. In this example, the long call spread is $7 wide, and the long put spread is $14 wide. Because of this, the maximum profit potential of this iron condor occurs when the stock price collapses through the long put spread. More specifically, this trade has $257 in profit potential on the upside and $957 in potential profits on the downside. Consequently, this long iron condor position has a slightly bearish bias.
Let’s see what happens!
Long Iron Condor #1 Trade Results
As we can see here, the iron condor suffers steady losses from time decay because the stock price is between the position’s breakevens as time passes. At expiration, the stock price is trading for $210.41, which means the long 208 call was worth $2.41. Meanwhile, all of the other options expire worthless, which means the final value of the iron condor at expiration is $2.41. With an initial purchase price of $4.43, the net loss on the position is $202: ($2.41 iron condor expiration value – $4.43 purchase price) x 100 = -$202.
Lastly, since the long 208 call is in-the-money at expiration, the trader would end up with +100 shares if the option was held through expiration. If the trader did not want a stock position, the 208 call would need to be sold before expiration.
Trade Example #2: Max Profit Iron Condor Purchase
In the following example, we’ll investigate a situation where the stock price rises continuosly and is above the iron condor’s long call spread at expiration.
Here are the trade details:
• Initial Stock Price: $121.45
• Strikes and Expiration: Long 119 Put and 124 Call; Short 115 Put and 128 Call; All options expiring in 46 days
• Premium Paid for Long Options: $1.25 for the 119 put + $1.05 for the 124 call = $2.30 in premium paid
• Premium Collected for Short Options: $0.39 for the 115 put + $0.38 for the 128 call = $0.77 in premium collected
• Net Debit (Price Paid): $2.30 premium paid – $0.77 premium collected = $1.53 net debit
• Breakeven Prices: $117.47 and $125.53 ($119 – $1.53 and $124 + $1.53)
• Maximum Profit Potential: ($4-wide spreads – $1.53 net debit) x 100 = $247
• Maximum Loss Potential: $1.53 net debit x 100 = $153
In this example, both the long call spread and long put spread are $4 wide, so the profit potential is equal on both sides of the trade.
Let’s take a look at the position’s performance:
Long Iron Condor #2 Trade Results
In this example, we can see that the iron condor performs very well because the stock price surges through the long call spread. At expiration, the 124/128 long call spread is entirely in-the-money, while the 119/115 put spread expires worthless. However, since the 124/128 call spread is worth $4 and the iron condor was purchased for $1.53, the trader realizes the maximum profit of $247: ($4 iron condor expiration value – $1.53 initial purchase price) x 100 = +$247.
Since the entire long call spread is in-the-money at expiration, the exercise and assignments would offset, resulting in no stock position for the trader. However, it’s always possibile for the trader to be assigned early on the short 128 call when it’s in-the-money before expiration.
Trade Example #3: Long Iron Condor Gone Wrong!
In the final example, we’ll look at a situation where a long iron condor expires worthless, resulting in the maximum loss potential for the trader who purchased the spread.
Here are the trade details:
• Stock Price: $574.81
• Strikes and Expiration: Long 535 Put and 615 Call; Short 505 Put and 645 Call; All options expiring in 46 days
• Premium Paid for Long Options: $11.75 for the 535 put + $10.40 for the 615 call = $22.15 in premium paid
• Premium Collected for Short Options: $6.03 for the 505 put + $4.47 for the 645 call = $10.50 in premium collected
• Net Debit (Price Paid): $22.15 premium paid – $10.50 premium collected = $11.65 net debit
• Breakeven Prices: $523.35 and $626.65 ($535 – $11.65 and $615 + $11.65)
• Maximum Profit Potential: ($30-wide spreads – $11.65 net credit) x 100 = $1,835
• Maximum Loss Potential: $11.65 net debit x 100 = $1,165
Let’s see how this trade performed:
Long Iron Condor #3 Trade Results
In this final example, we can see that the initial drop in the stock price leads to healthy profits for the long iron condor trader. However, the stock price rebounds back and is between the long strikes at expiration, in which case the iron condor expires worthless. With an initial purchase price of $11.65, the loss at expiration is $1,165: ($0 iron condor expiration value – $11.65 initial purchase price) x 100 = -$1,165
Long Iron Condor: Pros and Cons
Final Word
Congratulations! You now know how buying an iron condor works as a trading strategy. Be sure to recap the main concepts of this guide below.
- An iron condor consists of buying both a put spread and a call spread simultaneously.
- Both of these spreads must be of the same width and expiration.
- The max loss for iron condors is always the debit paid.
- Max gain for long iron condors is: (Width of Wider Spread – Debit Paid)
Long Iron Condor FAQs
In order for a long iron condor to be profitable, either the long call or long put purchased must rise in value. For call breakeven, the stock must rise to long call strike + debit paid. For put breakeven, the stock must fall to long put strike – debit paid.
For long iron condors that are in-the-money, profit should be taken before expiration to avoid being assigned on the short option and possibly exercised on the long option. It is best to have a pre-established profit taking price in place before placing iron condor trades.
The profitability of iron condors will depend upon the “moneyness” structure of the options traded, implied volatility and the price of the underlying security.
The further an iron condor is sold out-of-the-money, the greater its possibly of success will be.
Thanks for the article! Generally speaking, are long iron condors or short iron condors more profitable over the long run?
Thanks for the question Keith!
Over the long run, short iron condors tend to be more profitable than long iron condors. Why? Something called “time decay”. In the long iron condor, you’re net debit options (long a call and a put). If the stock doesn’t move at all, both of these options will fall in value. Double whammy!