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Condor

The long condor is a neutral strategy similar to the butterfly in that it is also a limited risk, limited profit trading strategy that is structured to earn a profit when the underlying stock is perceived to have little volatility.

Using calls, the options trader can setup a long condor by combining a bull call spread and a bear call spread. The trader enters a long call condor by writing a lower strike in-the-money call, buying an even lower striking in-the-money call, writing a higher strike out-of-the-money call and buying another even higher striking out-of-the-money call. A total of 4 legs are involved in this trading strategy and it requires a net debit to enter the trade.

Limited Profit

Maximum profit for the long condor spread is achieved when the stock price falls between the 2 middle strikes at expiration. It can be derived that the maximum profit is equal to the difference in strike prices of the 2 lower striking calls less the initial debit taken to enter the trade.

The formula for calculating maximum profit is given below:

• Max Profit = Strike Price of Lower Strike Short Call - Strike Price of Lower Strike Long Call - Net Premium Paid - Commissions Paid
• Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls

Limited Risk

The maximum possible loss for a long condor is equal to the initial debit taken when entering the trade. It happens when the underlying stock price on expiration date is at or below the lowest strike price and also occurs when the stock price is at or above the highest strike price of all the options involved.

The formula for calculating maximum loss is given below:

• Max Loss = Net Premium Paid + Commissions Paid
• Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call

Breakeven Point(s)

There are 2 break-even points for the condor. The breakeven points can be calculated using the following formulae.

• Upper Breakeven Point = Strike Price of Highest Strike Long Call - Net Premium Received
• Lower Breakeven Point = Strike Price of Lowest Strike Long Call + Net Premium Received

Example

Suppose XYZ stock is trading at $45 in June. An options trader executes a long condor by buying a JUL 35 call for $1100, writing a JUL 40 call for $700, writing another JUL 50 call for $200 and buying another JUL 55 call for $100. The net debit required to enter the trade is $300, which is also his maximum possible loss.

To further see why $300 is the maximum possible loss, lets examine what happens when the stock price falls to $35 or rise to $55 on expiration.

At $35, all the options expire worthless, so the initial debit taken of $300 is his maximum loss.

At $55, the long JUL 55 call expires worthless while the long JUL 35 call worth $2000 is used to offset the loss from the short JUL 40 call (worth $1500) and the short JUL 50 call (worth $500). Thus, the long condor trader still suffers the maximum loss that is equal to the $300 initial debit taken when entering the trade.

If instead on expiration in July, XYZ stock is still trading at $45, only the JUL 35 call and the JUL 40 call expires in the money. With his long JUL 35 call worth $1000 to offset the short JUL 40 call valued at $500 and the initial debit of $300, his net profit comes to $200.

The condor's maximum profit may be low in relation to other trading strategies but it has a comparatively wider profit zone. In this example, maximum profit is achieved if the underlying stock price at expiration is anywhere between $40 and $50.

The Short Condor

The converse strategy to the long condor is the short condor. Short condor spreads are used when one perceives the volatility of the price of the underlying stock to be high.

The Iron Condor

There exists a slightly different version of the long condor strategy which is known as the iron condor. It is entered with a credit instead of a debit and involve less commission charges.

Wingspreads

The condor spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures.

Neutral Strategies

Bullish Strategies

Bearish Strategies