Iron condor strategy explained with a payoff table
Sell an out-of-the-money put and call, buy further ones as protection: a range-bound trade with capped profit and capped loss.
An iron condor is a four-leg options position for a range-bound view. You sell an out-of-the-money put and an out-of-the-money call, and buy a further out-of-the-money put and call as protection. All four legs share one underlying and one expiry.
You collect a net premium upfront. You keep all of it if the underlying expires between the two sold strikes. The bought options cap the loss if the market breaks out either way. That cap is the whole difference between an iron condor and a short strangle.
The four legs
Illustrative numbers, not market prices. Nifty is at 25,000 and you expect it to stay roughly where it is until expiry.
- 1
1. Sell the 24,500 put for 80
The lower short strike. It earns premium if Nifty stays above 24,500.
- 2
2. Buy the 24,000 put for 30
The lower wing. It caps the loss if Nifty falls hard.
- 3
3. Sell the 25,500 call for 70
The upper short strike. It earns premium if Nifty stays below 25,500.
- 4
4. Buy the 26,000 call for 20
The upper wing. It caps the loss if Nifty rallies hard.
Payoff at expiry
Net credit = 80 minus 30 plus 70 minus 20 = 100 points. The put spread is legs 1 and 2; the call spread is legs 3 and 4. Figures are per unit of the index; multiply by the lot size the exchange sets for rupees per contract.
23,500
Put spread P&L
-450
Call spread P&L
+50
Net P&L
-400
24,000
Put spread P&L
-450
Call spread P&L
+50
Net P&L
-400
24,400
Put spread P&L
-50
Call spread P&L
+50
Net P&L
0
25,000
Put spread P&L
+50
Call spread P&L
+50
Net P&L
+100
25,600
Put spread P&L
+50
Call spread P&L
-50
Net P&L
0
26,000
Put spread P&L
+50
Call spread P&L
-450
Net P&L
-400
26,500
Put spread P&L
+50
Call spread P&L
-450
Net P&L
-400
| Nifty at expiry | Put spread P&L | Call spread P&L | Net P&L |
|---|---|---|---|
| 23,500 | -450 | +50 | -400 |
| 24,000 | -450 | +50 | -400 |
| 24,400 | -50 | +50 | 0 |
| 25,000 | +50 | +50 | +100 |
| 25,600 | +50 | -50 | 0 |
| 26,000 | +50 | -450 | -400 |
| 26,500 | +50 | -450 | -400 |
Breakevens, maximum profit and maximum loss
- check_circleMaximum profit = net credit = 100 points. It happens anywhere between 24,500 and 25,500, where all four options expire worthless.
- check_circleMaximum loss = width of one wing minus net credit = 500 minus 100 = 400 points. It happens at or below 24,000, or at or above 26,000.
- check_circleLower breakeven = lower short strike minus net credit = 24,500 minus 100 = 24,400.
- check_circleUpper breakeven = upper short strike plus net credit = 25,500 plus 100 = 25,600.
- check_circleOnly one side can lose at expiry, because Nifty cannot be below 24,500 and above 25,500 at once. That is why the loss is one wing width, not two.
Free account, this exam preselected.
Iron condor vs short strangle
Remove the two bought wings and an iron condor becomes a short strangle, which the NISM workbook does cover.
Legs
Short strangle
Short OTM put, short OTM call
Iron condor
Same two, plus a long further-OTM put and call
Market view
Short strangle
Range-bound
Iron condor
Range-bound
Maximum profit
Short strangle
Premium received
Iron condor
Net premium received (smaller, wings cost money)
Maximum loss
Short strangle
Unlimited in both directions
Iron condor
Limited to wing width minus net credit
Breakevens
Short strangle
Two
Iron condor
Two
| Feature | Short strangle | Iron condor |
|---|---|---|
| Legs | Short OTM put, short OTM call | Same two, plus a long further-OTM put and call |
| Market view | Range-bound | Range-bound |
| Maximum profit | Premium received | Net premium received (smaller, wings cost money) |
| Maximum loss | Unlimited in both directions | Limited to wing width minus net credit |
| Breakevens | Two | Two |
Limited loss is not small loss
In the example the trade risks 400 to make 100. Sold options also carry margin, and SEBI's October 2024 circular added an extra 2% Extreme Loss Margin on short index options on the day they expire, from November 20, 2024. This page explains the mechanics only; it is not a suggestion to trade.
How Series VIII tests this
The workbook teaches the parts: the short strangle and the bull put and bear call spreads. So the question you meet is usually about those parts. Expect a short strangle table with two strikes and two premiums, asking for the two breakevens or the maximum profit. The trap answers apply the premium on the wrong side of a strike, or call the short strangle's loss limited.
If you know that an iron condor is a bull put spread plus a bear call spread, you can answer any version of the question from first principles: profit capped at the net credit, loss capped at one wing minus that credit, breakevens at each short strike moved outward by the credit.
FAQs
What is an iron condor strategy?expand_more
Sell an out-of-the-money put and call, and buy a further out-of-the-money put and call, all on the same expiry. It earns a net premium if the underlying stays between the two sold strikes, with the loss capped by the bought options.
How do you calculate iron condor breakevens?expand_more
Lower breakeven = lower short strike minus net credit. Upper breakeven = upper short strike plus net credit. In the example, 24,400 and 25,600.
What is the maximum loss on an iron condor?expand_more
The gap between the strikes on one side minus the net credit. With 500-point wings and a 100-point credit, it is 400 points per unit.
Is the iron condor in the NISM Series VIII syllabus?expand_more
The workbook does not use the name. It covers the short strangle and the vertical spreads an iron condor is built from, under Unit 5 on option strategies, so the arithmetic is fully in scope.
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