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Iron Condors
Analyzing the risk profile of iron condors
Varying Width
Now that you've got the basic idea behind how iron condors work, let's take a look at some different variations you can create. We'll start by playing with the width of the entire spread. Take a look at what happens when you increase and decrease the range between the wings...
Standard Iron Condor
Above is the original iron condor you saw on the last page. The wings are each $3 wide and there is a $4-range between the short strikes. We collected $1.30, which means our total risk is $1.70 ($3 - $1.30). Compare this to the spreads below.
Wide Iron Condor
As you can see, the iron condor in the image above is super wide compared to the original. The distance between the two wings clearly give this spread a much higher POP. In exchange, the max profit potential is significantly lower at only $0.50, and the potential risk is far greater at $2.50 ($3 - $2.50).
Narrow Iron Condor
When we narrow the spread, we shrink our profit range. At the same time, we increase our max profit potential to $1.50 and lower our max risk down to $1.50.
Iron Fly
Selling the same short strike for both wings results in a spread commonly referred to as an "iron fly." You may have noticed how the risk profile of an iron condor looks like a defined-risk version of a Likewise, the iron fly is like a defined-risk By selling the strikes, we collect the largest credit and have the lowest loss potential. Our profitability zone is also much smaller than the other spreads, meaning the iron fly has lowest POP. It's not terribly common to start out with a strategy like this. Just like the straddle, iron flies are often the result of defensive maneuvers. If a trader expects a large and very little movement, however, this strategy might be a logical choice.