The iron condor is probably the most popular defined-risk options trade in retail. And on the surface, the logic is makes sense: Sell a strangle, buy wings to cap your risk, collect a smaller but “safer” premium. The problem is that this structure systematically destroys the very edge it’s supposed to monetize.
If you’re selling options because implied volatility is rich relative to what’s likely to realize which is the entire basis of any variance risk premium strategy then you need to understand where that premium actually lives on the vol surface. Because an iron condor gives back a disproportionate share of the premium you set out to capture.
The variance premium isn’t evenly distributed
Remember what variance risk premium is? The market’s tendency to overestimate future movement? That overestimation isn’t spread evenly across all options. It’s heavily concentrated in one specific place: deep out-of-the-money puts.
Why? Because the biggest fear in the market is a crash. Institutions, pension funds, and portfolio managers are constantly buying downside protection. That relentless demand inflates the price of puts that are far below the current market price. These options are the most "overpriced" relative to what's likely to actually happen. They carry the fattest premium.
And when you build an iron condor, those are exactly the options you buy as your protective wings.
Put IV steepens sharply as you move down the delta ladder. A 5-delta put might carry 30%+ implied vol while a 20-delta call sits near 13%. The skew gap can be 15 points or more.
These deep OTM puts are the most expensive options on the entire surface relative to the variance they’re likely to realize. And when you construct an iron condor, you buy them back as your wings. You’re purchasing the richest insurance on the board.
Think of it this way. You run an insurance company. Your best product is flood insurance in a desert town. People pay huge premiums for it even though it almost never floods. Business is great. Then your risk manager walks in and says, “We should buy flood insurance on our own office, just in case.” So you turn around and buy the exact same overpriced product you’ve been selling. The premium you collected with one hand, you’re handing back with the other. That’s what an iron condor does when it buys back deep out-of-the-money puts.
A better way to hedge
If you want protection, the key insight is to buy it where it’s cheapest, not where it’s most expensive.