Iron condor.
In plain English
An iron condor sells a call spread above the current price and a put spread below it, all with the same expiration date. The trader collects net premium up front and keeps it if the stock finishes between the two short strikes. The two long options, further out on each side, cap what can be lost if the stock breaks out. Maximum gain is the net premium collected. Maximum loss is the width of one spread minus that premium.
01Why it matters
It turns a view about calm into a defined bet, and it shows plainly that the reward is small and known while the loss, though capped, is usually the larger of the two numbers.
02The math, step by step
Say a stock trades at 200. A trader sells the 210 call and buys the 215 call, then sells the 190 put and buys the 185 put, collecting 1.50 per share net, or 150 for one contract. Finish between 190 and 210 and all four expire worthless, keeping the 150. Finish above 215 or below 185 and the loss is the 5 point width minus 1.50, or 3.50 per share (350).
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not a straddle. A straddle buys a call and a put and needs a big move in either direction to pay. An iron condor is the opposite view, selling premium and needing the stock to sit still, with long options attached only to cap the damage.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice