The Long Iron Condor is an intermediate strategy that can be profitable for stocks that are rangebound. It is the combination of a Bull Put Spread and a Bear Call Spread. The higher strike put is lower than the lower strike call in order to create the condor shape. Traders often will leg into the Long Iron Condor, first trading a Bull Put Spread just below support and then as the stock rebounds off resistance adding a Bear Call Spread, thereby creating the Long Iron Condor. Ideally the stock will remain between the two middle strikes, with the maximum profit occurring if the options expire between  these.

Buy lower strike put + Sell middle lower strike put + Sell middle higher strike call + Buy higher strike call = Long Iron Condor

With Long Iron Condors, your outlook is direction neutral. You expect little movement in the stock price. It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Maximum Risk:  [Difference in adjacent strikes - net credit]
Maximum Reward:  [Net credit received]
Breakeven Down:  [Middle short put strike - net credit]
Breakeven Up:  [Middle short call strike + net credit]

Advantages

1. Profit from a rangebound stock for no cost and low downside risk.
2. Capped and low risk compared with potential reward.
3. Comparatively high profit potential if the stock remains rangebound

Disadvantages

1. The higher profit potential comes with a narrower range between the wing strikes.
2. The higher profit potential only comes nearer expiration.
3. Bid/Ask Spread can adversely affect the quality of the trade.

Example

ABCD is trading at $27.50 on April 12, 2009. Buy the May 2009 $20 strike put for $0.25. Sell the May 2009 $25 strike put for $1.25. Sell the May 2009 $30 strike call for $1.30. Buy the May 2009 $35 strike call for $0.35.

Net Credit:  Premiums sold – premiums bought
                                                 1.95
Maximum Risk:  Difference in adjacent strikes – net credit
                                    5.00 – 1.95 = 3.05
Maximum Reward:  Net credit
                                                  1.95
Breakeven Down:  Lower middle strike – net credit
                                    25.00 – 1.95 = 23.05
Breakeven Up:  Upper middle strike + net credit
                                    30.00 + 1.95 + 31.95
Max ROI:  63.93% if the stock is between the middle strikes at expiration