Reverse Iron Condor

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The reverse (short) Iron Condor is a limited risk, limited profit trading strategy that is designed to earn a profit when the underlying stock price makes a sharp move in either direction.

To setup a Reverse Iron Condor, the options trader buys a lower strike out-of-the-money put, sells an even lower strike out-of-the-money put, buys a higher strike out-of-the-money call and sells another even higher strike out-of-the-money call. A net debit is taken to enter this trade.

Limited Profit Potential

Maximum gain for the Reverse Iron Condor strategy is limited but significantly higher than the maximum possible loss. It is attained when the underlying stock price drops below the strike price of the short put or rise above or equal to the higher strike price of the short call. In either situation, maximum profit is equal to the difference in strike between the calls (or puts) minus the net debit taken when initiating the trade.

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Limited Risk

Maximum loss for the Reverse Iron Condor strategy is also limited and is equal to the net debit taken when entering the trade. Maximum loss occurs when the underlying stock price at expiration is between the strikes of the long call and the long put. At this price, all the options expire worthless so the trader is left with nothing except a loss equal to the initial debit taken.

Breakeven Point(s)

There are 2 break-even points for the Reverse Iron Condor position. The breakeven points can be calculated using the following formulae.

Example

Suppose XYZ stock is trading at $45 in June. An options trader executes a Reverse Iron Condor by selling a JUL 35 put for $50, buying a JUL 40 put for $100, buying another JUL 50 call for $100 and selling another JUL 55 call for $50. A net debit of $100 is taken upon entering the trade.

Suppose if XYZ stock is still trading at $45 on options expiration in July, all 4 options expire worthless. Since the trader had taken a debit of $100 on entering the trade, he suffers a loss of $100. This is also his maximum possible loss.

If XYZ stock is instead trading at $35 on expiration date, only the long JUL 40 put option expires in the money. This JUL 40 put option is worth $500 and therefore the trader's profit is $400 after deducting the initial $100 debit. A similar situation occurs when the underlying stock trades at $55 on expiration date. In this case, only the long JUL 50 call option expires in the money and it is also worth $500.

To further see why $400 is the maximum possible profit, let's examine what happens when the stock price falls below $35 to $30 on expiration date. At this price, both the JUL 35 put and the JUL 40 put options expire in-the-money. The short JUL 35 put has an intrinsic value of $500 while the long JUL 40 put is worth $1000. Selling the long put for $1000 and buying back the short put for $500 still leaves the trader with a net $500. Subtracting the initial debit of $100 taken, his profit is still $400. A similar situation occurs when the stock trades above $55 with the call options.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the Reverse Iron Condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Short Put Butterfly

Short Condor

Short Butterfly

The Long Iron Condor

The converse strategy to the Reverse Iron Condor is the long Iron Condor. Long Iron Condor spreads are used when one perceives the volatility of the price of the underlying stock to be low.

Wingspreads

The Reverse Iron Condor spread belongs to a family of spreads called wingspreads whose members are named after a various flying creatures.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.