Iron Condor
Prerequisite strategies: you must have traded both halves separately — the bull put spread and the bear call spread — and have granted an option and been assigned at least once, through the cash-secured put or the covered call. Clear the Level 2 gate first. Next: the iron butterfly.
Why this structure exists
An iron condor is a short strangle with wings. That is not an analogy, it is the construction: the same two short options, plus one further-out long option on each side, same expiry, same size. Everything that makes this a Level 2 structure and the naked strangle a Level 3 one is contained in those two extra legs.
Quantify what they buy. On the FTSE 100 chain modelled below, the naked 8,550 / 9,550 strangle collects £867.43, ties up £9,000 of buying power and has no worst case at all. Add the 8,300 put and the 9,800 call for £309.94 and the credit falls 35.7% to £557.49 — but the maximum loss becomes the width minus the credit, £1,942.51, which nothing that happens afterwards can change, and buying power falls 78.4% to that same figure. The £9,000 that funds one strangle funds 4.6 condors, and all 4.6 together lose less in a 20% gap than the strangle does.
Why not just sell the strangle? Because its risk is defined by collateral, so the margin requirement rises as you lose — from £9,867.43 to £25,255.47 in that gap, at the exact moment equity falls by £13,592.04. The condor's requirement is £1,942.51 on the day you open it and £1,942.51 in the gap. Risk defined by construction is not a smaller version of risk defined by collateral; it is a different instrument, and it is the organising idea of this tier.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Long put (wing) | BUY (debit) | 1 contract = £10 per index point | One wing width below the short put | Same as all legs | −0.05 to −0.08 | 15.78 pts = £157.76 |
| Short put | SELL (credit) | 1 contract, same size | 16 delta below spot, beyond −1 SD | 30–60 days; never a weekly | −0.15 to −0.20 | 47.13 pts = £471.25 |
| Short call | SELL (credit) | 1 contract, same size | 16 delta above spot, beyond +1 SD | Same as the short put | +0.15 to +0.20 | 39.62 pts = £396.18 |
| Long call (wing) | BUY (debit) | 1 contract, same size | One wing width above the short call, equal to the put wing | Same as all legs | +0.05 to +0.08 | 15.22 pts = £152.18 |
| NET | Net credit | 1 condor | 8,300 / 8,550 / 9,550 / 9,800, FTSE at 9,000 | 45 days | +0.016 | 55.75 pts = £557.49 |
Four legs, one expiry, one size, both wings the same distance out. Break the last of those and the maximum loss becomes the wider width minus the credit, not the width you thought you had bought. Four inequalities before the order goes in:
Formulas: max profit = (net credit × £10) − opening costs, on any settlement between the shorts. Max loss = (wing width × £10) − net credit = £2,500 − £557.49; £1,950.51 with the £8.00 opening commission, £1,958.51 if you also pay to close. Breakevens = short put − credit, short call + credit. Modelled at entry: 72.5% chance of finishing between the breakevens, 67.3% of the whole credit, 14.0% of the full loss.
Compare this frame with the short strangle's: identical scale, identical short strikes, and the tails stop instead of running off the bottom. That is the whole difference, drawn. The dashed line is the position today — it touches zero at 9,000 and lies below the payoff everywhere, because the £549.49 plateau exists only on the settlement morning.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| IV rank / IV percentile | IVR ≥ 30 and IVP ≥ 30, on a 12-month range. Below 30 there is no trade here | Delta selection fixes the odds; only implied volatility changes the price. On this 11–25% range the credit runs £200.55 at IVR 0, £557.49 at IVR 36 and £931.09 at IVR 79 — 8.0%, 22.3% and 37.2% of the same width |
| Credit vs width | Net credit ≥ 20% of the wing width | The IV-rank gate saying no in a second language. Below it the payoff ratio is worse than 1 : 4 and no realistic win rate rescues it |
| Term structure | Front month at or above the second | You are short £70.49 of vega a point; contango means selling the cheap end of the curve while the risk sits in your expiry |
| Days to expiry | 30–60 at entry, closed at 21 | Theta peaks at £16.91 a day near 21 DTE then falls away while gamma at a tested strike multiplies. The last three weeks are unpaid risk |
| Strikes | 16 delta both shorts, equal wings, both breakevens beyond ±1 SD | ICE lists FTSE 100 exercise prices in intervals of 25, 50, 100 or 200 points, so 16 delta rounds to 8,550 and 9,550. Equal deltas are not equal distances |
| Liquidity | Package spread ≤ 5% of the mid; open interest ≥ 250 on the shorts, ≥ 100 on the wings | Four legs, eight spread crossings round trip. A 5% package spread is £55.75 — 10.0% of the credit, against £16.00 of commission |
| Underlying | A cash-settled index; the ICE FTSE 100 series is the only UK chain deep enough | FTSE 100 index options are European style, so the short legs cannot be assigned early — the largest single risk removed from a four-leg credit position |
| Event calendar | No MPC decision, US CPI print, index review or quarterly roll in the window | A condor is short exactly what an event delivers, and the wings cap the loss without preventing it |
Do not enter if: IV rank is below 30 — at IVR 0 the 16-delta condor pays 18.0% of its width for a 1 : 4.56 payoff while the modelled chance of profit is higher, at 74.4%, which is exactly how a probability-selected book loses money; the credit is under 20% of the width; the wings are unequal; the maximum loss exceeds 2% of the account; you hold a cash account or lack spread permission; or you cannot state the maximum loss in pounds before you click.
Credit or debit: the same range, two structures
A neutral range can be sold or bought. The debit version of this exact position is the long call condor: buy the 8,300 call, sell the 8,550 call, sell the 9,550 call, buy the 9,800 call. Same strikes, same expiry, same payoff shape — and in the UK, a materially worse trade.
| Iron condor (credit) — this page | Long call condor (debit) | |
|---|---|---|
| Legs on FTSE at 9,000 | Sell 8,550 put + 9,550 call, buy 8,300 put + 9,800 call | Buy 8,300 call, sell 8,550 and 9,550 calls, buy 9,800 call |
| Cash at entry | Receive £557.49 | Pay £1,930.21 |
| Max profit / max loss | £549.49 / £1,942.51 | £569.79 / £1,930.21 |
| Breakevens | 8,494.3 / 9,605.7 | 8,493.0 / 9,607.0 |
| Buying power used | £1,942.51 (width − credit) | £1,930.21 (the debit) |
| Day-one chargeable gain | £867.43 — two out-of-the-money grants | £5,400.52 — two near-the-money grants, 6.2× larger |
These are the same position. Add the entry prices — 55.749 points of credit and 193.021 of debit — and you get 248.77 points, the £2,500 width discounted 45 days at 4%. The credit is not an edge; it is a cash-flow convention. What separates them here is TCGA 1992 s.144(1): the debit version grants two calls close to the money and books a £5,400.52 chargeable gain on day one — £1,296.12 of CGT at 24% — to chase a £569.79 maximum. Build the range as a credit condor.
The real IV-rank decision for a flat market is between selling this range and buying time: a 45/80-day 9,000 call calendar spread costs £680.77 and is long £41.15 of vega a point where the condor is short £70.49. Below IV rank 25 that is the neutral structure; above 30, this one.
Greeks at entry and how they evolve
| Greek | Entry, 45 DTE, 9,000 | 22 DTE, unchanged | 7 DTE, unchanged | +1 SD (9,505.6, IV 14%) | −1 SD (8,494.4, IV 20%) |
|---|---|---|---|---|---|
| Delta (£ per point) | +0.16 | +0.20 | +0.06 | −2.60 | +2.25 |
| Gamma (£/pt per 100 pts) | −0.44 | −0.60 | −0.19 | −0.38 | −0.15 |
| Theta (£ per day) | +12.45 | +16.91 | +5.29 | +9.47 | +5.65 |
| Vega (£ per vol point) | −70.49 | −46.64 | −4.64 | −28.95 | −13.28 |
| Position mark | £557.49 | £213.99 | £9.01 | £762.01 | £1,111.53 |
Black–Scholes, 16% implied volatility unless stated, 4% rates, 3.5% index dividend yield, per one £10-a-point contract, signs for the net position; the ±1 SD columns are at 22 DTE. These inputs reproduce the short strangle page's +0.16 delta, −0.97 gamma, +£27.38 theta and −£154.64 vega exactly, so the two pages can be read side by side.
The wings are a single uniform purchase: they remove 54.5% of the theta (£27.38 to £12.45 a day), 54.4% of the vega (−£154.64 to −£70.49) and 54.4% of the gamma (−0.97 to −0.44), for 35.7% of the credit and 78.4% of the buying power — a 54% smaller position at a 78% discount to its capital cost.
Vega decides whether this trade wins; gamma decides what losing costs, and the character flip is dated rather than priced. Theta rises from £12.45 a day at entry to a peak of £16.91 around 21 days, then collapses to £5.29 by 7 — while gamma at a tested 8,550 strike runs −£0.24 per 100 points at 21 DTE, −£0.75 at 7 and −£2.74 at 2. Sixty-five per cent of the credit is collected by 21 DTE; the last 35% is paid for by carrying that multiplying gamma through expiry week. Holding to settlement is a gamma decision, not a patience one.
FTSE 100 at 9,000, implied volatility 16%, IV rank 36, 45 days to run
The ICE FTSE 100 index option is worth £10 per index point — £90,000 of notional at 9,000 — is European style so no leg can be exercised against you early, settles in cash against the Exchange Delivery Settlement Price, ticks in 0.5 points (£5), trades 08:00–16:50 London and, on the third Friday, stops trading as soon as reasonably practicable after 10:15. One standard deviation over 45 days at 16% is 505.6 points; on an 11–25% twelve-month range, 16% is an IV rank of 36 — above the gate, not far above it.
The trade, placed as a single four-leg order:
Branch A — the target fires. Index unchanged, volatility flat, 25 days to expiry.
Branch B — the put side is tested. FTSE 8,550 with 30 days left, implied volatility up to 20%.
Branch C — the gap. FTSE opens 7,200, down 20%, implied volatility 45%, 45 days still to run. The branch this structure exists for.
Branch D — held to settlement at an EDSP of 9,140. All four legs finish out of the money and the full £549.49 is kept. Cash settlement means no delivery, no assignment notice, no stamp duty and no closing commission — the one case in which running to expiry is cheaper, and still not what the time stop says to do.
On an ICE UK single stock instead the structure fails on friction. A BP condor at 530p, 45 days, 26% implied volatility — 455 / 480 puts, 580 / 605 calls — collects 4.96p × 1,000 shares = £49.64 against a 25p width, a maximum loss of £200.36. A 10% bid-ask on four legs, normal on a thin UK chain, costs £20.13 round trip: 40.5% of the credit before a tick of market risk. And the series are American style and physically delivered, so the short 480 put can be assigned early into 1,000 shares costing £4,800 plus £24.00 of SDRT — the risk the FTSE 100 version does not carry. The iron condor is a UK index trade.
On a US underlying the gain is computed in sterling on each disposal date. A $250 net credit at GBP/USD 1.3552 fixes £184.47 of proceeds at the grant date; buying it back for $125 with the rate at 1.3000 costs £96.15 rather than the £92.24 an unchanged rate would have given. Dollar profit 50.0%; sterling profit £88.32, 47.9%. On credits this small the conversion spread lands on top, and twice.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Every premium is modelled from Black–Scholes at the stated inputs rather than taken from a live chain, and 9,000 is an illustrative round number. Real fills are worse. Past performance, including any illustrative example shown here, is not a reliable indicator of future results.
Management and adjustment
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Net delta beyond ±£1.00 a point | Gamma has turned a range trade directional | Roll the untested spread toward the money for a credit. In Branch B, 9,550 / 9,800 → 8,950 / 9,200 for +£327.38, cutting maximum loss to £1,615.12 | Roll the tested spread away. You buy your loss back at its dearest, and the width you widen is the width you can lose |
| Short strike tested, 21+ DTE left | Defensible if the arithmetic permits | Roll the untested side only, same expiry, for a credit, wings still equal | Roll for a net debit. That raises the maximum loss above the number you agreed — the one promise this structure makes |
| Index inside a wing (under 8,300 or over 9,800) | The tested spread is at or near its full width; nothing left to defend | CLOSE. The residual credit is worth more than the remaining optionality | Hold "because the loss is capped anyway". The cap is not a reason to pay the last of it |
| Loss reaches 200% of credit (£1,114.98) | Failed on its own terms, at roughly −1.54 SD | CLOSE. All four legs, one order | Add contracts to average the credit. Doubling into short gamma is how defined risk becomes undefined risk in aggregate |
| Implied volatility expands after entry | A vega loss (−£70.49 a point) that is not yet a delta loss | Hold if delta is inside the band and the stop is intact; richer options make every roll pay more | Panic-close on the mark. At −1 SD the marks show −£673.57 while that level at expiry pays +£1.31 |
| Implied volatility collapses after entry | The thesis paid, early | Take the 50% target the day it appears, whatever the DTE | Hold for the rest of the theta. £12 a day is not worth expiry-week gamma |
| Index gaps through a short strike | Undefendable, but already bounded | CLOSE at the open and size the loss. The gap to 7,200 costs £1,639.65 of the £1,942.51 maximum | Adjust. Every adjustment at a gap is a larger position wearing the word "defence" |
| 21 days to expiry reached | Theta has peaked; gamma at a tested strike has not | Close, or roll the whole condor to the next monthly for a credit | Carry it into expiry week for the last £197 |
| Assignment notice on a short leg | Impossible on the FTSE 100 — European, cash settled | Nothing. On an ICE UK single-stock condor, exercise the matching wing and accept the 0.5% SDRT | Assume US behaviour. The contract specification, not the strategy name, decides this |
ROLL WHEN the index is still inside the band or has only just left it, more than 21 days remain, and the roll goes through for a net credit without widening either wing. ROLL TO a new strike on the untested side in the same expiry, or the same shape in a later one — never both in one order, or you will not know which decision worked. DO NOT ROLL a credit position for a net debit, ever; on a defined-risk structure that rule has teeth, because a debit roll is the only way to make the maximum loss larger than the figure you wrote down.
THE CORRECT ACTION IS TO CLOSE, NOT ROLL, when the loss reaches twice the credit, when the index has gapped rather than drifted, when it is inside a wing, when 21 days are left, or when the only roll available is a debit. A fifth case is peculiar to this structure: when the roll is technically a credit but a trivial one. Rolling the tested Branch B condor out to a 65-day 8,050 / 8,300 / 9,300 / 9,550 closes the near position for £1,054.44 and reopens for £1,063.01 — a net credit of £8.56, 24p a day for 35 more days of exposure, leaving an all-in worst case of £1,933.94 against the £1,942.51 you already had. Defence has a budget and the budget is the credit. When a roll cannot buy a real reduction in risk you do not have an adjustment; you have a loss, and the only question is what size you take it at.
Exit rules
If all four rules are silent, do nothing and check net delta tomorrow. "Nothing" costs £0.44 of gamma per 100 points and earns £12.45.
Margin and broker reality
A cash account cannot hold this trade, and that is where most UK first attempts die. Two of the four legs are granted options, and a cash account has no mechanism to carry one: Interactive Brokers permits only limited purchase and sale of options in a Cash account, so the order is rejected in the preview rather than at the exchange. You need a Margin account with spread permission, for which IBKR's published minimum is USD 2,000 or equivalent. Hargreaves Lansdown, AJ Bell and Trading 212 offer no options at all, so this is an Interactive Brokers or Saxo trade.
What you do not need is uncovered-option permission. Each short is covered by a long of the same type, expiry and size further from the money, so this is two covered verticals and is margined as such. Because only one side can finish in the money the requirement is one width, £2,500, not two; the £557.49 credit lands in cash, so buying power falls by £1,942.51. What matters is what happens next: maintenance is that same £1,942.51 for the life of the trade and does not move with the marks. After the 20% gap in Branch C the requirement is still £1,942.51, where the strangle's rose 156% to £25,255.47 in the same instant its equity fell. Margin on a short strangle is pro-cyclical; margin on a condor is a constant.
Enter and exit as a single four-leg order. Legging in leaves you briefly holding a naked short option, which the platform will refuse or margin punitively, and it is how a defined-risk trader accidentally becomes a Level 3 one. And treat the bid-ask as a margin-equivalent cost: eight crossings round trip, a 5% package spread of £55.75 against £16.00 of commission.
net credit ≥ 20% of the wing width AND IV rank ≥ 30, with the width set by max loss ≤ 2% of the account and never by the credit it produces.Portfolio fit
One condor contributes a net delta of £0.16 a point — 1.63% of one FTSE 100 contract, about £1,467 of index-equivalent exposure — so a book of these is a volatility book, not a directional one, sized on net vega and buying power rather than delta. Each carries −£70.49 of vega and +£12.45 a day of theta on £1,942.51 of buying power.
The honest arithmetic belongs here, not in a footnote. At the 2% rule one 250-point-wide FTSE 100 condor needs £97,125 of account, well beyond this tier's £10,000–£25,000 baseline. Narrow the wings to 100 points and the maximum loss falls to £720.20, needing £36,010; to 50 points and it is £349.14, needing £17,457 — but that version collects £150.86, against which £16.00 of commission and a 10% package spread of £15.09 take 20.6% of the credit. Small size does not remove the risk, it moves it into the frictions. Five 250-wide condors on £100,000 risk £9,712.55 (9.7% of capital) and carry −£352 of net vega — but all five sit on one index, so they are one trade with five commissions, and that is the constraint that binds.
What to trade instead
Simpler, from the tier below: the covered call is the only Level 1 way to be paid for a market that goes nowhere — no short put, no four-leg fill, no margin account, but its risk is defined by the 1,000 shares you must already own.
Half of it, at this tier: a single bull put spread or bear call spread is one side of this trade: two legs, half the friction, a directional lean and roughly half the credit. Start there; the condor is what you graduate to when you genuinely have no view.
Narrower, at this tier: the iron butterfly moves both shorts to 9,000 with the same 250-point wings, collecting £2,006.73 for a £493.27 maximum loss — a 1 : 0.25 payoff ratio against this trade's 1 : 3.48, paid for with a 30.9% modelled chance of profit against 72.5%. Take it for the ratio, never the odds.
Undefined, from the tier above: the short strangle is this trade without wings: £867.43 of credit instead of £557.49, £9,000 of buying power instead of £1,942.51, and no maximum loss at all. It collects 9.6p of credit per pound of buying power against this structure's 28.7p. For nearly every UK retail account the condor is the correct expression of the same view, and being boring is the feature.
Risk statement
Listed options are complex instruments and most retail positions lose money. Defined risk means the loss is bounded, not that it is small: £1,942.51 is 3.5 times the credit and can be lost on a single overnight gap. This is educational material about mechanics, margin and UK tax treatment, not a recommendation to trade the FTSE 100 or anything else, and it takes no account of your circumstances. Every figure here is modelled rather than quoted. If your trading becomes frequent enough to raise the investor-versus-trader question, that is one for a qualified adviser.