The Iron Condor option strategy can be thought of as a limited-risk way to sell a strangle. The trade has a relatively high probability of a relatively small gain.
Option Trading Subjects:
The Outlook: Neutral. Not expecting any dramatic movement up or down before the expiration of the options.
The Trade: For the trade graphed above, an "Iron" Condor, sell puts one strike below the current stock price, buy puts one strike lower than that, AND sell calls one strike above the current stock price, and buy calls one strike higher than that.
Gains when: Stock stays between the strike prices sold.
Maximum Gain: On an "Iron" Condor, limited to the initial credit.
Loses when: Stock moves beyond one of the breakeven points.
Maximum Loss : Limited to the largest difference in strike prices on one side times the number of shares represented, less the initial credit.
Breakeven Calculation: (For an "Iron" Condor) Lower breakeven = put strike price - initial credit. Upper breakeven = call strike price + initial credit.
Advantages compared to stock: Increased leverage, much less capital required, "built-in" stop loss, can gain from no stock movement or limited stock movement, while still allowing for some bullish or bearish movement.
Disadvantages compared to stock: Risk of losing more than the initial credit.
Volatility: after entry, increasing implied volatility is negative.
Time: after entry, the passage of time is positive.
Margin Requirement : An "Iron" Condor can be thought of as a Bull Put plus a Bear Call, both of which require margin equal to the difference in the strike prices times the number of shares represented. Some brokers will require full margin as if both sides could lose ($1000 in the example), other brokers recognize that only one side can lose and therefore require half the margin ($500 in the example).
Variations: Use all calls or all puts. An "Iron" Condor is called Iron because it uses both puts and calls.
The graphs below show that the Condor strategy can be set up with all Calls or all Puts, and the graph is nearly identical to the "Iron" Condor. The main difference is the Iron Condor is entered for a credit, and these trades have an initial debit.