Reverse Iron Condor Strategy — Guide, Volatility & Calculator

A reverse iron condor is a long volatility strategy that combines a bull call spread above current price with a bear put spread below current price. This creates profit potential from large moves in either direction while limiting maximum risk to the net debit paid.

Use the interactive chart below or jump to the setup guide to understand strike selection and breakout profit zones for volatile market environments.

Interactive Payoff Chart

When to Use Reverse Iron Condors

• Outlook: Expecting large directional move but uncertain of direction.
• Volatility: Low IV environments before anticipated volatility expansion.
• Events: Before earnings, FDA approvals, or major announcements.
• Breakouts: When price is consolidating near key technical levels.

Setup: Strike Selection & Breakout Zones

Four-Leg Construction

1. Buy call spread: Buy lower strike call, sell higher strike call (above current price)
2. Buy put spread: Buy higher strike put, sell lower strike put (below current price)

Strike Selection Guidelines

• Symmetry: Place call and put spreads equidistant from current price when possible.
• Width: Wider spreads increase profit potential but also cost more.
• Breakout levels: Position spreads near expected support/resistance levels.
• Liquidity: Ensure all four legs have adequate volume for efficient execution.

Expiration

• Align expiration with expected timing of volatility event.
• Shorter-term for earnings; longer-term for clinical trials or regulatory decisions.
• Balance time decay against probability of large move occurring.

Want to optimize breakout zones? Try the Reverse Iron Condor Calculator to model different strike combinations and volatility scenarios.

Payoff, Breakeven & Greeks

• Max Profit: Unlimited upside; strike width minus debit downside.
• Max Loss: Net debit paid (if stock stays between long strikes).
• Breakeven points: Lower long strike plus debit; upper long strike minus debit.

Greeks (net position)

• Delta: Near zero at inception; becomes directional as stock moves.
• Theta: Negative; hurt by time decay.
• Vega: Positive; benefits from rising implied volatility.
• Gamma: Positive outside profit zones; accelerates gains on large moves.

Management & Timing

• Early profit taking: Consider closing when achieving 100-200% gains on debit.
• Time management: Monitor time decay acceleration as expiration approaches.
• Volatility tracking: Watch for IV expansion that may increase position value.
• Event-based: Have clear plan for post-event management regardless of outcome.

Adjustment Techniques

• Closing profitable side: Take profits on one spread if large move materializes.
• Rolling to different strikes: Adjust positioning if move is insufficient.
• Converting to single spread: Close one side to reduce cost if direction becomes clear.
• Time extensions: Roll to next expiration if event timing changes.

Worked Example (Illustrative)

XYZ at $150 before earnings. Set up reverse iron condor: Buy $145/$140 put spread for $2.50, Buy $155/$160 call spread for $2.50. Total debit: $5.00.

• Max loss: $5.00 if XYZ stays between $145-$155.
• Upside breakeven: $160 ($155 + $5 debit).
• Downside breakeven: $140 ($145 - $5 debit).
• Profit potential: Unlimited upside; $0 if XYZ goes to zero.

The strategy profits if XYZ moves significantly in either direction after earnings. Use the calculator to model different volatility scenarios.

Frequently Asked Questions

Disclaimer

This page is for educational purposes only and is not investment advice. Options involve risk and are not suitable for all investors. Consider consulting a qualified professional. Examples are illustrative and exclude fees/slippage.

Sources & further reading: Cboe Options Education · OCC Investor Resources