Iron Condor Starter Plan: Entries, Strikes, and Risk Management for Neutral Markets

Education only. Options involve risk; not investment advice.

TL;DR

An iron condor combines a bull put spread and a bear call spread on the same underlying, same expiration. You collect credit from both sides and profit if the stock stays within a range. Max profit = total credit; max loss = (width − credit) × 100. Best for neutral, low-volatility environments. Key success factors: picking the right deltas, managing winners early, and cutting losers fast.

What’s an Iron Condor?

An iron condor has four legs:

1. Sell OTM put (collect premium)
2. Buy further OTM put (cap downside risk)
3. Sell OTM call (collect premium)
4. Buy further OTM call (cap upside risk)

Structure:

• Two vertical spreads: one put spread below current price, one call spread above
• Same expiration
• Both spreads are credit spreads

Goal: Stock stays between the two short strikes → both spreads expire worthless → you keep all credit.

Example: Iron Condor on SPY

SPY trading at $450, 30 days to expiration.

Put spread (bull put):

• Sell $435 put (20 delta) for $1.50
• Buy $430 put for $0.50
• Credit: $1.00 × 100 = $100

Call spread (bear call):

• Sell $465 call (20 delta) for $1.50
• Buy $470 call for $0.50
• Credit: $1.00 × 100 = $100

Total credit: $200

Breakevens:

• Lower: $435 − $1.00 = $434
• Upper: $465 + $1.00 = $466

Max profit: $200 (if SPY is between $435 and $465 at expiration)

Max loss: (Width − total credit) × 100 = ($5 − $2) × 100 = $300 (if SPY moves beyond either spread)

Payoff at expiration:

Visual profit zone:

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The beauty of the iron condor? You make money as long as the stock stays in that $30 range between $435 and $465. That’s a lot of wiggle room.

Selecting Strikes: The Delta Method

Step 1: Choose Your Deltas

• Conservative: 10–15 delta short options (~85–90% probability of profit per side)
  • Wider profit zone, but lower credit
• Moderate: 20–25 delta (~75–80% PoP per side)
  • Balanced credit and safety
• Aggressive: 30–35 delta (~65–70% PoP per side)
  • Higher credit, narrower safe zone

Recommendation for beginners: Start at 20 delta on both sides.

Step 2: Determine Width

• Narrow (e.g., $5 wide): Lower max loss, easier position sizing
• Wide (e.g., $10 wide): Higher max loss, fewer contracts needed

Rule of thumb: Width = 5–10% of underlying price

• SPY at $450 → $5–10 width = 1.1–2.2% of price

Step 3: Calculate Risk-Reward

Target credit ≥ 25–33% of width:

• $5 wide → aim for ≥$1.25 credit
• $10 wide → aim for ≥$2.50 credit

Example:

• $5 wide, $1.50 total credit → 30% of width → good
• $5 wide, $0.75 total credit → 15% of width → pass (risk/reward too skewed)

When to Enter: Market Conditions

Best Environments

1. Low expected volatility (VIX < 20, stable markets)
2. Range-bound price action (stock consolidating)
3. Post-earnings (IV crush already happened, no near-term catalysts)
4. After large moves (stock exhausted, likely to rest)

Avoid

1. Before earnings (gap risk on both sides)
2. High IV environments (fat premiums tempting, but risk of big moves)
3. Strong trends (momentum can blow through one side)
4. FOMC, CPI, or major macro events within DTE

IV Rank check: If IV rank > 50, consider waiting or using a different strategy (like single credit spreads on the directional side).

Position Sizing and Risk Management

Max Loss Per Trade

• Risk 1–2% of account per condor
• Example: $50k account, 2% risk = $1,000 max loss
• If max loss is $300 per condor → can trade 3 contracts

Portfolio-Level Risk

• Don’t put all capital into condors at once
• Diversify by underlying, expiration, and strike zones
• Example: 3 condors on SPY, QQQ, IWM (different correlations)

Stop Loss Rules

1. Percentage of credit: Exit if loss = 2× credit received
   • Collected $200 → close if loss reaches $400
2. Percentage of max loss: Exit at 50–75% of max loss
   • Max loss $300 → close at $150–225 loss
3. Technical breach: If stock breaks through short strike with momentum, don’t wait

Key: Stick to your rule. Don’t “hope” it comes back.

Management: Adjust vs. Exit

When to Take Profits Early

• 50% of max profit: Close at 50% credit capture (e.g., close for $100 debit if you collected $200)
  • Reduces risk, frees capital for next trade
• 75% of max profit: Close at 75% capture
  • Slightly more aggressive

Why not hold to expiration?

• Remaining profit is small relative to risk of reversal
• Theta decay slows dramatically in final days
• Assignment risk increases if short strikes are approached

When One Side Is Threatened

Option 1: Close the Whole Position

• Simple, clean exit
• Realize loss and move on

Option 2: Close the Threatened Side

• Roll or close just the put or call spread
• Leaves the other spread open (now you have a single credit spread)
• Frees up capital and limits loss

Example: SPY drops to $438 (approaching $435 short put)

• Close put spread for $150 loss
• Leave call spread open (may still expire worthless for $100 profit)
• Net: −$50 vs. −$300 if you held to max loss

Option 3: Roll the Threatened Side

• Close threatened spread, open new spread further out in time and/or strikes
• Collect additional credit or reduce loss
• Risk: Extends exposure and ties up capital longer

Example: Roll $435/$430 put spread to next month $430/$425

• May collect $0.50 additional credit
• New breakeven improves, but adds 30 more days of risk

When to roll: If you still believe in the neutral thesis and have the capital/patience.

Earnings and Events: Special Considerations

IV Crush Post-Earnings

• Opportunity: Sell condors after earnings when IV drops
• Why: Premiums normalize, but stock often settles into range

Example: Stock reports earnings, pops 3% but IV drops from 60% to 30%. Sell condor in the new range.

Avoid Selling Before Earnings

• Gap risk on both sides
• Even if you sell wide strikes, a 10% move can breach
• Exception: Advanced traders use earnings-specific tactics (not recommended for starters)

Dividends and Ex-Div Dates

• Calls may face early assignment if deep ITM before ex-div
• Usually not an issue with OTM condors, but be aware

Common Mistakes

1. Selling too close (high delta strikes for more credit)
   • Increases probability of loss
2. Holding to expiration
   • Assignment risk, pin risk, minimal remaining credit
3. Not taking losses
   • One bad trade can wipe out 5 winners
4. Over-leveraging
   • Selling 20 condors because “it’s only $50 margin each”
5. Ignoring events
   • Selling pre-FOMC, pre-CPI, or before known catalysts
6. Asymmetric widths
   • $5 wide on one side, $10 wide on other → uneven risk
7. No exit plan
   • Hope is not a strategy

Starter Plan: 30-Day Iron Condor on SPY

Rules

1. Underlying: SPY (liquid, diversified, lower gap risk)
2. DTE: 30–45 days (sweet spot for theta decay)
3. Deltas: 20 delta on both short strikes
4. Width: $5 on both sides
5. Credit target: ≥$1.25 total (25% of combined width)
6. Position size: Risk 2% of account max
7. Profit target: Close at 50% of max profit
8. Stop loss: Close at 2× credit or if short strike breached
9. No earnings: Check calendar before entry
10. Review weekly: Don’t set and forget

Example Execution

• Account size: $25,000
• Max risk per trade: 2% = $500
• SPY at $450, 35 DTE
• Sell $435/$430 put spread for $1.00 credit
• Sell $465/$470 call spread for $1.00 credit
• Total credit: $2.00 × 100 = $200
• Max loss: ($5 − $2) × 100 = $300
• Position size: 1 condor (risk $300, within $500 limit)
• Profit target: Close when condor can be bought back for $1.00 (50% profit)
• Stop loss: Close if loss reaches $400 or SPY breaches short strike

Weekly Monitoring

• Week 1: Check position, note P&L, look for technical changes
• Week 2–3: If at 50% profit, close. If loss approaching stop, evaluate exit or roll
• Week 4: If still open and nearing expiration, close to avoid assignment risk

Metrics to Track

1. Win rate: % of trades that hit profit target or expire worthless
   • Target: 65–75% with 20-delta condors
2. Average win vs. average loss
   • Goal: Avg loss ≤ 2× avg win
3. Risk-adjusted return
   • P&L relative to max risk deployed
4. Days in trade
   • Shorter = more efficient use of capital

Sample log:

Checklist: Before Entering an Iron Condor

• Stock is range-bound or low volatility (VIX < 20 preferred)
• No earnings or major events within DTE
• Short strikes are ~20 delta (or your chosen delta)
• Both spreads are equal width (e.g., both $5 wide)
• Total credit ≥ 25% of combined width
• Max loss fits position sizing (≤ 2% of account)
• Profit target set (50–75% of max profit)
• Stop loss defined (2× credit or technical breach)
• Have a plan for threatened side (close, roll, or hold)

FAQ

Q: What’s a good win rate for iron condors? A: With 20-delta strikes, aim for 65–75%. Lower deltas = higher win rate but less credit.

Q: Should I adjust or just take the loss? A: Depends. If thesis changed (e.g., stock now trending), take loss. If temporary move, consider adjusting. Beginners: take loss and re-enter later.

Q: Can I trade iron condors in an IRA? A: Yes, if your broker allows spreads in IRAs (most do). Max loss is defined, so it’s considered lower-risk than naked options.

Q: What if both sides are threatened? A: Rare but possible (e.g., huge IV spike). Close the position immediately. Don’t wait for max loss on both sides.

Q: How many condors should I have on at once? A: Start with 1–3. Diversify by underlying or expiration. Don’t deploy all capital at once.

Related Guides

• Vertical Spreads: Credit vs Debit with Real Payoff Math
• Greeks in Practice: The 80/20 Guide to Delta, Theta, Vega
• Naked Options 101: Risk, Margin, and When Not to Use Them

Disclaimer: This is education only. Options trading involves significant risk and is not suitable for all investors. Consult a financial advisor before trading.