An Options Strategy for Range-Bound Markets: the Iron Condor

Strategy

An iron condor is four option positions at four different strikes ($K_1 < K_2 < K_3 < K_4$):

Initial net credit $R$

This is the total you receive up front when you open the trade, and also the strategy’s maximum potential profit ($R$):

$R = (\text{Put}_{K2} + \text{Call}_{K3}) - (\text{Put}_{K1} + \text{Call}_{K4})$

Because $K_2$ and $K_3$ are closer to spot, the credit from selling them is necessarily larger than the debit from buying $K_1$ and $K_4$, so $R$ is always positive.

Expiration P&L

Let the underlying price at expiration be $S_T$. Final P&L $\Pi$ works as follows:

Key metrics

• Max profit: $R$
• Max risk: $W - R$ (assuming equal wing width $W = K_2 - K_1 = K_4 - K_3$)
• Upper breakeven: $K_3 + R$
• Lower breakeven: $K_2 - R$

After expiration

What happens at expiration depends on whether the option is in the money (ITM) or out of the money (OTM) at that moment.

Simply: OTM expires worthless; ITM is exercised automatically.

If the $K_3$ call you sold is breached (price > $K_3$) at expiration:

• Assignment: you are forced to sell 100 shares at $K_3$.
• The risk: if you do not already hold those 100 shares, you become short stock.
• Margin pressure: a short stock position needs a lot of margin. If the account cannot support it, you can blow up or get force-liquidated.

The system will handle expiration, but do not sit and wait for automatic settlement.

1. Take profits: once you have captured 80%–90% of the expected credit, close manually (buy to close). There is no point taking the last few hours of gap risk for the last few cents.
2. Near the short strikes: if price is very close to $K_2$ or $K_3$, close it. In the minutes after the close, price can still move, flipping an OTM option ITM and triggering unexpected exercise (pin risk).
3. Wings getting hit: you bought $K_1$ or $K_4$ as insurance, but if you let both sides exercise, you pay two fat commission bills.