Range-Bound Income: Iron Condors

The bull put spread is bullish, because a fall threatens its short Put. The bear call spread is bearish, because a rise threatens its short Call. Held together, they say “I expect a range”, not “I expect one direction”. Contract name and direction stay separate: selling the Put does not turn it into a Call, and selling the Call does not make it bullish. The combined sensitivity also changes as the index moves.

It is a credit because the premiums you receive for the two shorts are larger than the premiums you pay for the wings. The cash arrives at entry, but the obligations stay open. The wings cost you part of the short premium, and in return they offset losses beyond the outer strikes. While all four legs stay in place, those offsets cap the loss at expiry, before costs. So the order of the strikes matters: long Put, short Put, short Call, long Call, from lowest to highest.

If this is new, read the lesson on directional vertical spreads first. The OIC iron-condor page supports this structure. Its US exercise and assignment procedures are not the settlement rules for our NSE index example.

You make the most when the final settlement level lands anywhere from 24,500 to 25,500, endpoints included. All four options are then worth zero and you keep the whole credit: ₹17,792.04 before costs. That flat top is the maximum-profit plateau. Settling outside a short strike shrinks the result, but it does not turn it into a loss straight away. At 25,700, for example, the short Call owes 200 points per unit while the long Call and both Puts owe nothing. The credit minus that liability leaves +₹4,792.04.

The zero-result levels are farther out. Subtract the total credit from the short Put strike and the lower breakeven is about 24,226.28. Add it to the short Call strike and the upper breakeven is about 25,773.72. Between the breakevens the result at expiry is positive before costs, and between the short strikes it is at its maximum. Touching a strike during the week is a different event from settling there.

Below 24,000, the long Put gains value as fast as the short Put loses it, which leaves a fixed 500-point spread liability. Above 26,000 the two Calls do the same job. Take the total credit off that 500 points and multiply by 65, and the maximum loss at expiry is ₹14,707.96 before costs. At one final level, only one of the two spreads can owe anything, so the two widths are not added. Over the life of the trade, though, separate exits or adjustments can still produce realised losses on both sides.

Here the maximum profit is bigger than the maximum loss. A different credit can reverse that. With equal wings, the loss is larger than the profit whenever the credit is less than half the width. Neither comparison tells you how likely each result is, or what you can expect to earn. The chart is an accounting map of settlement outcomes, not a forecast. Its cap assumes all four matched legs stay in place, and it leaves out costs, financing and the prices you get on an early exit.

The farther long Call now costs ₹115.25 per unit in the model. Because it is cheaper, the credit rises to about 320.85 points, or ₹20,855.43 for 65 units. Recalculate the credit whenever you change a leg. If you keep the old credit, the maximum profit, both breakevens and both tail losses are wrong. The maximum-profit range is still 24,500 to 25,500, because the short strikes did not move.

The Put-side cap is now (500 minus the new credit) × 65, or ₹11,644.57. The Call-side cap uses 750 instead of 500 and comes to ₹27,894.57. The overall maximum loss at expiry is the larger of the two, not their sum. The new breakevens, before costs, are about 24,179.15 and 25,820.85. Both come from the new total credit, even though only the upper wing moved.

A wider wing leaves more room for the Call spread’s liability to grow before the long Call finishes offsetting it. The extra credit is the price of that, a different protection bargain. A wider profit range or a bigger maximum profit does not make a better trade. The larger tail, the option prices, the spread of possible outcomes and your costs all count. This comparison teaches how the payoff changes. It does not recommend widening a wing.

Near the centre, at NIFTY 25,000, the bought wings cancel much of what the sold body does. The net Delta is about −0.1298 rupees per point, close to zero but not exactly zero. Negative Gamma means an upward move pushes Delta more negative, and a downward move pushes it more positive. So a position that starts balanced can become more sensitive in either direction. Positive Theta of about +₹637.17 per calendar day points to a lower closing debit as time passes. Negative Vega of about −₹426.44 per IV point points to a higher debit if IV rises. These are separate sensitivities. They are not a forecast of tomorrow’s result.

At NIFTY 27,000, beyond the bought Call wing, the same model gives Gamma of about +0.002982 and Vega of about +₹178.69 per IV point. The nearer bought Call now outweighs the sold Call in those measures. Theta turns negative, at about −₹253.49 per calendar day, while Delta stays negative. So collecting a credit does not make a condor negative Gamma, positive Theta and negative Vega at every level. A different expiry, or a different IV at each strike, can move the points where the signs flip.

A Greek is a local slope. If you multiply the opening Vega by a big IV change, or assume the opening Theta lasts a whole week, you can get the result wrong. Theta does not pay cash into your account each day. A small net Delta also does not give the probability of a profitable trade, because sensitivity to price, finishing inside a range and earning a net profit are different questions. For the single-option basics, revisit Delta, Theta, Vega and Gamma. The next chapter replaces a local estimate with fresh prices for all four options.

At NIFTY 25,500 and 18% IV, the gross model change is still a gain of about ₹4,258.29, even though NIFTY has reached the short Call strike. At NIFTY 27,000 and 18% IV, it is a loss of about ₹13,136.99. Lower IV is not a guaranteed help: at that same 27,000 spot, the 36% alternative has a smaller model loss of about ₹9,014.86. Beyond the upper wing, the four legs’ exposures differ from those near the centre. Repricing captures that, where stretching the entry Vega across a big move does not.

The maximum-loss plateau at expiry is also not the exact loss whenever spot crosses a wing before expiry. With nine days left, the premiums still price in possible movement before settlement. The expiry chart and today’s closing mark answer different questions. Even at a familiar spot level, a change in time or in the shape of volatility across strikes can change what it costs to close.

These are model marks. They are not tradable quotes or recorded fills. A displayed bid, ask or midpoint may differ from the price you get for the quantity you need, and a quoted basket does not prove that every leg traded. A realised result needs the actual opening and closing fills, less costs and funding. The six alternatives teach valuation under stated assumptions. They are not an event forecast, an exit rule or proof of a profitable strategy.

In our model, the two shorts bring in ₹37,036.59 for 65 units. The two wings cost ₹19,244.55, which leaves the condor’s ₹17,792.04 net credit. That gap is the price of the offsets. The smaller credit also pulls the condor’s breakevens inward, compared with the same shorts unprotected. Protection caps the loss at expiry while the legs stay intact. It gives you no free edge in probability, and it does not remove funding and execution needs.

A short strangle’s bigger credit and a condor’s capped payoff answer different questions. Blocked margin depends on your actual portfolio, the hedges the exchange recognises, and current clearing and broker rules. Check it separately. Do not guess it from the loss formula. For the unprotected version, see the lesson on straddles and strangles, and for the funding side, see the margin rules lesson.

Two related names change the arrangement. A credit iron butterfly puts its short Put and short Call at the same inner strike, so the maximum-profit plateau shrinks to a single point. A reverse iron condor does the opposite: it buys the two inner options and sells the outer wings, usually for a debit. It profits at expiry from a big enough move either way, with both profit and loss capped. It reverses the range bargain. It does not make the original condor safer. Compare the real strikes and premiums before you draw conclusions from a strategy name.

No construction by itself gives a high win rate or dependable income. Even a model probability of finishing inside a band rests on an assumed distribution. Touching a strike, finishing inside the maximum-profit range and ending with a net profit are three different events. Costs and realised losses matter as much as how often you win. The next chapters connect the payoff and the valuation to the records of a structure that actually filled.

The paper entry brings in 273.70 points per unit × 65 = ₹17,790.50. The completed exit costs 225.00 points × 65 = ₹14,625.00. The difference is +₹3,165.50 gross. Take off one assumed ₹400.00 charge for all eight transactions together and the net is +₹2,765.50. That charge is not a current tariff or tax calculation. The assumed fill prices already contain their execution prices, so taking off a second generic spread or slippage allowance would count that effect twice. Once all four legs are closed, later moves up to expiry do not change this completed result.

A different entry credit also changes the payoff at expiry. If this paper position had stayed intact until expiry, its equal-wing loss cap would be (500 − 273.70) × 65 = ₹14,709.50 before costs. The earlier model cap is ₹14,707.96, from its unrounded synthetic credit. These two amounts belong to different entry assumptions. The paper prices do not replace the model inputs in the Greek and repricing figures. And the assumed closing charge belongs to the completed ledger, not to every possible expiry outcome.

Blocked margin is collateral that supports an open obligation. It is not a trading fee and not the loss cap. Premium funding and available cash matter too. NSE Clearing’s margin framework assesses portfolio risk with SPAN, collects initial margin upfront and reassesses risk during the day. Check the requirement for the portfolio you actually hold, and your broker’s own funding and risk rules. A recognised hedge can change portfolio margin, but the payoff formula gives no fixed capital requirement, and it does not ensure you can keep the position open until expiry.

Suppose you intended two assumed lots, or 130 units on every leg. Both shorts fill 130 units each, but each bought wing fills only 65. You hold one matched 65-unit condor plus an uncovered 65-unit short strangle. The extra short Call has no cap on its upside loss, and the extra short Put has a large downside exposure. If only one wing fills, only that side is protected. Applying one condor’s loss cap to all 130 short units would misstate your real exposure.

The order of your trades can change your exposure on the way in or out. Hold the wings before you open the shorts and the offsets are there when the shorts fill. That costs premium and does not guarantee the other orders will trade. Sell a wing before buying back its short and the offset is gone in between. A rejected order, an adjustment or a broker closing individual legs can change the structure as well. A planned stop is an order, not a contractual wing. NSE’s limit-price-protection FAQ explains that a stop-limit order can be rejected after it triggers. Even an accepted limit still needs a matching trade. After each fill, recalculate your exposure from what remains.

Attach the execution reports, so the record shows when each wing and short filled, along with rejected orders and unfilled quantities. Keep model marks, displayed quotes and actual fills clearly apart. A midpoint valuation helps a model comparison but does not prove you could close at that price. After any leg changes, keep the cash you have already realised and rebuild the contracts that remain. The payoff of the original intact condor cannot describe a new position or a string of adjustments.

Reconcile the cash received and paid across all legs against your actual fee and tax statement. Record the margin estimate with its timestamp, later changes, collateral and available cash, so that funding is never quietly counted as profit or as a transaction cost. For a stock-option study, also keep the delivery policy, the final obligation and the evidence for any netting. A separate exchange settlement record belongs in a held-to-expiry journal. It is different evidence from an early closing fill.

To study repeated outcomes, define the sample and your entry and exit rules before you look at the results. Keep the bad periods and any gaps in the data or the fills. Compare net rupee results and drawdowns alongside the count of winners, because many small gains can be wiped out by fewer, larger losses and charges. Test how your conclusions change under different but credible fill and cost assumptions, and look at data outside the period used to build the rule. This lesson gives a payoff and accounting example. It is not a backtest, a measured win rate or evidence of a trading edge. Its ten-day model input, strikes and fictional early close are not a recommended entry or profit-taking routine.

The condor gets its protection from bought options against sold options. The next lesson, covered calls and collars, starts from shares you already own. A covered Call uses those shares to back the delivery obligation of a sold Call, and it gives up gains above the strike. The shareholder still bears a fall in the price. A collar adds a bought Put to that stock-and-Call position. Comparing the actual ownership and contracts shows how different kinds of cover change the payoff.