Buying Iron condors is one of the most popular option strategies in use today. Many professional advisors adopt this strategy when investing money for their clients, and they charge hefty fees to manage those portfolios.

What is an iron condor?

An iron condor is a market neutral strategy (performs best when the underlying stock or index trades within a range, as opposed to making a large move in either direction) consisting of four different options. Two calls and two puts. All options expire on the same day.

If any of the following terms are unfamiliar, use the glossary.

There are two ways to look at an iron condor position.

• Sell one call spread. Sell one put spread. To me, this choice makes it easier to understand how the strategy works.



• Sell two strangles and buy two strangles. The strangles bought are further out of the money.

In either case, you sell options with a higher premium and buy options that cost less. Thus, you collect cash when initiating the position.

The width of the call and put spreads are equal. That means the two calls are as far apart from each other as the two puts.

Although it may seem strange, when you sell the spreads and collect cash, you are buying the iron condor.

Example

XYZ is currently $151 per share. You don't believe this stock is going to make a major move anytime soon and want to profit if the stock does indeed trade in a narrow price range over the next couple of months. Assume that September expiration is seven weeks from today and that you want to buy three iron condors.

A. Sell one put spread and one call spread:

• Sell 3 XYZ Sep 145 puts and buy 3 XYZ Sep 140 puts


• Sell 3 XYZ Sep 155 calls and buy 3 XYZ Sep 160 calls



• NOTE: the two calls are five points apart and the two puts are five points apart in this example. It doesn't matter how near the calls are to the puts, as long as the strike prices do not overlap.

B. Sell one strangle and buy another (further out of the money) strangle:

• Sell 3 XYZ Sep 145 puts and 3 XYZ Sep 155 calls


• Buy 3 XYZ Sep 140 puts and 3 XYZ Sep 160 calls



• NOTE: You can buy any strangle, as long as the call and put are equidistant from the call and put sold.

That's an iron condor.

This page provides basic information about iron condor positons, but there's more to learn:

Download our free eBook. It's a sampler of The Rookie's Guide to Options: The Beginner's Handbook of Trading Equity Options, which describes six option strategies in detail. Buying iron condors is one of those six.