Glossary · Options
Iron Condor
Last updated:
An iron condor is a four-leg options position that sells an out-of-the-money call spread and an out-of-the-money put spread on the same underlying and expiry — collecting net premium that is kept if the underlying stays between the two short strikes, with losses strictly capped by the bought wings. It is a strangle with insurance: the long options on each side cap the tail risk that makes naked selling dangerous, at the cost of part of the premium.
Example
NIFTY at 25,000. A trader sells the 25,400 call for ₹70 and buys the 25,600 call for ₹35; sells the 24,600 put for ₹65 and buys the 24,400 put for ₹32. Net credit = (70 − 35) + (65 − 32) = ₹68, or 68 × 75 = ₹5,100 per set of lots. Maximum profit is that ₹5,100 if NIFTY expires between 24,600 and 25,400. Maximum loss = wing width minus credit = (200 − 68) × 75 = ₹9,900, hit only beyond a long strike. Hypothetical prices, before costs; margin benefits for hedged positions apply.
Why it matters
The capped-loss structure is what makes iron condors attractive for automation: worst-case risk is known at entry, so position sizing is exact and no single trending day can produce an unbounded hole. The trade-offs — lower credit, four legs of slippage, and adjustment rules when one side is threatened — are all parameter choices that deserve testing over many expiries rather than intuition.
In INDfolio AI, four-leg structures like iron condors are built leg-by-leg and backtested on NSE options data — see Options backtesting.