Construction and the expected move
Lesson 9 · about 12 min
An iron condor is two credit verticals on the same underlying and expiration: a bull put spread below the price and a bear call spread above it. It profits if the stock stays inside a range, and it is the structure most people mean when they say "selling premium." A short strangle is the same idea without the protective wings. Both start from one number: the expected move.
The expected move
Implied volatility is an annualized figure. To turn it into a range for a specific expiration:
Expected move (1 standard deviation) = price × IV × √(days ÷ 365)
XYZ at $50, IV 30%, 45 days: 50 × 0.30 × √(45/365) = 50 × 0.30 × 0.351 ≈ $5.27, call it $5.30. The market is pricing a one-standard-deviation range of about $44.70 to $55.30, which a normal distribution says contains the price at expiration about 68% of the time. A quicker cross-check that needs no formula: the at-the-money straddle price is about 0.8 of the expected move; here the 45-day straddle trades near $4.20, and 4.20 ÷ 0.8 ≈ $5.25.
Short strikes go just outside that range. That is why "sell the 16 delta" and "sell outside one standard deviation" are the same instruction.
The condor
XYZ at $50, 45 days, IV 30%. Sell the $44 put (delta −0.15) and buy the $39 put; sell the $56 call (delta 0.14) and buy the $61 call.
| Leg | Price | Cash |
|---|---|---|
| Sell $44 put | 0.55 | +0.55 |
| Buy $39 put | 0.15 | −0.15 |
| Sell $56 call | 0.50 | +0.50 |
| Buy $61 call | 0.12 | −0.12 |
| Net credit | +0.78 |
- Max profit: $0.78 per share, $78 per condor, if XYZ finishes between $44 and $56.
- Max loss: width − credit = $5.00 − $0.78 = $4.22, $422, if XYZ finishes below $39 or above $61. Only one side can lose, so the buying power held is $422, not $844.
- Breakevens: $44 − $0.78 = $43.22 and $56 + $0.78 = $56.78.
- Return on buying power at max profit: $78 ÷ $422 = 18.5% for 45 days.
- Probability of finishing between the breakevens, from the deltas at those prices (about 0.12 and 0.11): roughly 77%.
| XYZ at expiry | Put spread owed | Call spread owed | Total owed | P&L per share | P&L per condor |
|---|---|---|---|---|---|
| 35 | 5.00 | 0.00 | 5.00 | −4.22 | −$422 |
| 39 | 5.00 | 0.00 | 5.00 | −4.22 | −$422 |
| 41 | 3.00 | 0.00 | 3.00 | −2.22 | −$222 |
| 43.22 | 0.78 | 0.00 | 0.78 | 0.00 | $0 |
| 44 | 0.00 | 0.00 | 0.00 | +0.78 | +$78 |
| 50 | 0.00 | 0.00 | 0.00 | +0.78 | +$78 |
| 56 | 0.00 | 0.00 | 0.00 | +0.78 | +$78 |
| 56.78 | 0.00 | 0.78 | 0.78 | 0.00 | $0 |
| 59 | 0.00 | 3.00 | 3.00 | −2.22 | −$222 |
| 61 | 0.00 | 5.00 | 5.00 | −4.22 | −$422 |
| 65 | 0.00 | 5.00 | 5.00 | −4.22 | −$422 |
Iron condor 39/44 - 56/61 for 0.78 credit
+78 | ____________________
| / \
0 |--------X----------------------X-------- X = 43.22 / 56.78
| / \
-422 |______/ \______
+---+---+---+---+---+---+---+---+---+---+
37 39 41 43 45 47 50 53 56 59 61 63 XYZ at expiry
Approximate Greeks per condor: delta about 0, gamma −4.4, theta +$1.80/day, vega −$5.10 per IV point. The position earns about $1.80 a day on a calm day, loses about $51 if IV jumps 10 points, and gets shorter gamma every day.
The strangle
Sell the same $44 put and $56 call, no wings. Credit $1.05, breakevens $42.95 and $57.05, undefined loss in both directions. Initial buying power under standard (Reg-T) margin is set by a formula, roughly 20% of the stock value minus the out-of-the-money amount plus the premium, per side, with the larger side held; here about $545.
| Iron condor | Short strangle | |
|---|---|---|
| Credit | $78 | $105 |
| Max loss | $422 | Undefined (about $4,295 at $0, plus) |
| Initial buying power | $422 | ~$545, and it rises as the stock approaches a strike or IV rises |
| Return on initial buying power | 18.5% | 19.3% |
| Legs to pay bid-ask on | 4 | 2 |
| Loss if XYZ = $38 at expiry | −$422 | −$495 |
| Loss if XYZ = $30 at expiry | −$422 | −$1,295 |
At first glance they are the same trade with a slightly better ratio for the strangle and $27 more credit. The differences are all in the tail: the strangle's loss keeps growing, its buying power requirement grows with it (exactly when you have the least of it), and a fast gap can take it past any stop you set. The wings cost $27 per condor and cap all of that.
Building it
- Compute the expected move, or read it off the straddle.
- Put the short strikes just outside it, check they are near 15–20 delta on each side.
- Choose the wing width from the dollar loss you accept per condor (next lesson).
- Enter as a single four-leg order at or near the mid; never leg in one spread at a time.
- Record credit, max loss, breakevens and the plan: profit target, stop, and the 21-day exit.
Key idea: Expected move = price × IV × √(days/365); one standard deviation is where the 16-delta strikes sit. An iron condor sells a put spread below and a call spread above that range: max profit is the credit, max loss is one width minus the credit, only one side can lose. A strangle is the same without wings, and everything it gains is in the tail it leaves open.
Try it: Pick a liquid stock or index ETF. Compute the 45-day expected move from its IV, then check the ATM straddle price divided by 0.8. Build a condor with short strikes just outside the move and $5 wings in the options profit calculator; record credit, max loss, breakevens and the Greeks. Then remove the wings and note the change in credit and in buying power.
Recap
- Expected move = price × IV × √(days ÷ 365); ATM straddle ≈ 0.8 × expected move.
- An iron condor is a bull put spread plus a bear call spread; only one side can lose, so buying power is one width minus credit.
- Max profit = credit; max loss = width − credit; breakevens = short strikes ± credit.
- The condor here nets 0 delta, −4.4 gamma, +$1.80 theta and −$5.10 vega per contract.
- A strangle collects more with no cap on loss and a margin requirement that grows when the trade goes wrong.