Options strategies
Iron condors, strangles and straddles, explained
Some option trades don’t bet on a direction. They make money if the stock stays in a range. What “delta-neutral” means, how iron condors, strangles and straddles work, and what can go wrong.
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What delta is, and what “near zero” means
Delta is how much an option’s price moves when the stock moves $1. A call with a delta of 0.30 gains about $0.30 a share when the stock rises $1. Puts have negative delta: a put with a delta of −0.30 gains about $0.30 when the stock falls $1.
Delta also works for a whole position. Add up the deltas of every option, times 100 shares per contract, and you get a number in “share-equivalents”. A net delta of +30 behaves roughly like owning 30 shares. A net delta of −30 behaves like being short 30 shares.
A delta-neutral trade has a net delta near zero. Small moves up or down barely change its value. It is not a bet that the stock will rise or fall. It is a bet that the stock will stay inside a range, or that options are priced for a bigger move than will actually happen.
The usual way to build one is to sell an option on each side of the stock price: a put below and a call above. The put’s delta is positive for the seller and the call’s is negative, so they roughly cancel.
Three common delta-neutral trades
- Short straddle. Sell a put and a call at the same strike, usually the one nearest the stock price. It collects the most premium, but it only keeps all of it if the stock finishes exactly at the strike.
- Short strangle. Sell a put below the stock price and a call above it. The credit is smaller, but the stock has room to move before you lose money.
- Iron condor. A short strangle with protection: sell the put and the call, then buy a cheaper put further below and a cheaper call further above. The bought options cap the loss. An iron condor is really two credit spreads, a put spread and a call spread, on the same expiration.
Strikes for strangles and iron condors are often picked by delta. Many traders sell options with a delta of about 0.15 to 0.25 on each side. A delta of that size is a rough stand-in for a 15% to 25% chance of finishing in the money, so the stock has a cushion in both directions.
For all three, the credit is the premium you collect up front. It is also the most you can make. You keep all of it only if every sold option expires worthless, which for a straddle almost never happens.
A worked iron condor
The example uses a $100 stock, 30 days to expiration, IV of 30%, a 4% interest rate and no dividend, priced with the Black-Scholes model, before fees. Each spread is $5 wide.
Example
Four legs, one credit
- Buy the $87 put for about $0.16 (delta about −0.04).
- Sell the $92 put for about $0.68 (delta about −0.15).
- Sell the $108 call for about $0.97 (delta about 0.21).
- Buy the $113 call for about $0.35 (delta about 0.09).
The put spread brings in $0.68 − $0.16 = $0.52 and the call spread $0.97 − $0.35 = $0.62. The total credit is $1.14 a share, or $114 for one contract of each.
Most you can make: the $114 credit, if the stock finishes between $92 and $108.
Most you can lose: ($5 − $1.14) × 100 = $386, if the stock finishes below $87 or above $113. Only one side can lose at expiration, so the risk is one spread’s width, not two.
Breakevens: $92 − $1.14 = $90.86 and $108 + $1.14 = $109.14.
The position starts with a net delta of about −2, so it acts like being short about 2 shares. The model puts its probability of profit (POP) at about 71%.
| Stock at expiration | What happens | Profit or loss |
|---|---|---|
| $80 | Put spread fully in the money | −$386 |
| $87 | Put spread fully in the money | −$386 |
| $90.86 | Lower breakeven | $0 |
| $92 | Everything expires worthless | +$114 |
| $100 | Everything expires worthless | +$114 |
| $108 | Everything expires worthless | +$114 |
| $109.14 | Upper breakeven | $0 |
| $113 | Call spread fully in the money | −$386 |
| $120 | Call spread fully in the money | −$386 |
Drawn as a chart, this is a flat-topped hill: a $114 plateau between the sold strikes, sloping down on each side to a $386 floor beyond the bought strikes.
Straddle, strangle and iron condor side by side
Same stock and inputs. The strangle sells the same $92 put and $108 call as the iron condor without buying the protection. The straddle sells the $100 put and call.
| Position | Credit | Breakevens | POP | Most you can lose | Net delta at $106 |
|---|---|---|---|---|---|
| Short straddle $100 | $685 | $93.15 and $106.85 | 57% | Unlimited | −55 |
| Short strangle $92/$108 | $165 | $90.35 and $109.65 | 74% | Unlimited | −40 |
| Iron condor $87/$92/$108/$113 | $114 | $90.86 and $109.14 | 71% | $386 | −16 |
The pattern is the same as with single options. The straddle collects the most but needs the stock to stay very close to $100. The strangle gives more room. The iron condor collects less than the strangle because it pays for protection, but its loss has a floor.
The last column matters too. All three start near zero delta: about −6 for the straddle and strangle, and about −2 for the iron condor. If the stock climbs to $106, they no longer are. The straddle and strangle now act like being short 40 to 55 shares, the iron condor about 16, and each keeps losing as the stock rises. The bought wings are what keep the iron condor’s drift smaller.
What makes them win or lose
- Time decay helps. Options lose value as expiration gets closer, and you sold more value than you bought. The iron condor above starts out earning about $3.73 a day from time alone. If the stock is still at $100 after 15 days, the model values it at about $68 of profit.
- Falling IV helps. If IV drops from 30% to 20% right after you open the iron condor, the model says it is worth about $76 of profit straight away. This is the “IV crush” that often follows an earnings report.
- Rising IV hurts. If IV jumps from 30% to 45% instead, the same position shows a loss of about $94, even with the stock unchanged.
- Big moves hurt most. A move through either sold strike turns the trade into a loss at expiration. Delta-neutral trades are short movement, so a stock that jumps or slides quickly works against you.
Put simply, these trades are paid for accepting the risk of a large move. When options are priced for more movement than happens, they tend to win. When the move is bigger than the price assumed, they lose, sometimes several months’ worth of credits at once. For how IV is judged, see IV Rank, explained.
Risks to understand first
Risk
Strangles and straddles have undefined risk
A sold call has no limit on how much it can lose, because a stock has no limit on how high it can go. A sold put can lose almost the whole strike if the stock collapses. Brokers usually require a higher options approval level and a margin account for these trades. An iron condor’s bought wings are what make its loss known in advance.
- Gaps. A stock can open far from yesterday’s close after news. A gap can jump straight past your sold strike and your breakeven, with no chance to close the trade in between.
- Earnings. Option prices rise before a report because a big move is possible. Selling a straddle or strangle across earnings is a bet that the move will be smaller than priced, and when it isn’t, the loss can be large. See How earnings move stocks.
- Assignment. A sold option that is in the money can be assigned, sometimes early: a sold call most often just before an ex-dividend date, a sold put when it is deep in the money. On an iron condor, assignment on one short leg can leave you holding shares, or short shares, until you act, even though the bought leg still limits the loss at expiration.
- Staying near zero delta. The neutral starting point doesn’t last. As the stock moves, the net delta grows in the opposite direction. Some traders adjust by closing or rolling the side that is being tested. Each adjustment costs fees and can lock in a loss.
- Closing early. Many traders close these positions before expiration, for example once they have kept half the credit, to avoid the last days when a small move can swing the result a lot.
Building one on Wenlo today
Wenlo’s options chain has Put spread and Call spread presets. They are the two halves of an iron condor. Open a stock’s options page and pick an expiration. Choose Put spread with a delta range of about 0.15 to 0.25 and note the credit and max loss. Then choose Call spread with the same range and the same width.
Add the two credits for the iron condor’s credit. The max loss is the larger single-spread loss minus the other spread’s credit, because only one side can lose at expiration.
The calculator prices one option at a time, so you can check each leg’s price, delta and chance of finishing in the money. For how POP is worked out, see Probability of profit (POP), explained.