Short Condor

The short condor is a neutral strategy similar to the short butterfly. It is a limited risk, limited profit trading strategy that is structured to earn a profit when the underlying stock is perceived to be making a sharp move in either direction.

Short Condor Construction
Buy 1 ITM Call
Sell 1 ITM Call (Lower Strike)
Buy 1 OTM Call
Sell 1 OTM Call (Higher Strike)

Using calls, the options trader can setup a short condor by combining a bear call spread and a bull call spread. The trader enters a short call condor by buying a lower strike in-the-money call, selling an even lower striking in-the-money call, buying a higher strike out-of-the-money call and selling another even higher striking out-of-the-money call. A total of 4 legs are involved in this trading strategy and a net credit is received on entering the trade.

Limited Profit Potential

The maximum possible profit for a short condor is equal to the initial credit received upon 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 profit is given below:

  • Max Profit = Net Premium Received - Commissions Paid
  • Max Profit Achieved When Price of Underlying <= Strike Price of Lower Strike Short Call OR Price of Underlying >= Strike Price of Higher Strike Short Call
Short Condor Payoff Diagram
Graph showing the expected profit or loss for the short condor option strategy in relation to the market price of the underlying security on option expiration date.

Limited Risk

Maximum loss is suffered when the underlying stock price falls between the 2 middle strikes at expiration. It can be derived that the maximum loss is equal to the difference in strike prices of the 2 lower striking calls less the initial credit taken to enter the trade. 

The formula for calculating maximum loss is given below:

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

Breakeven Point(s)

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

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

Example

Suppose XYZ stock is trading at $45 in June. An options trader executes a short condor by selling a JUL 35 call for $1100, buying a JUL 40 call for $700, buying another JUL 50 call for $200 and selling another JUL 55 call for $100. A net credit of $300 is received on entering the trade.

To further see why $300 is the maximum possible profit, 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 credit taken of $300 is his maximum profit.

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

On the flip side, if XYZ stock is still trading at $45 on expiration in July, only the JUL 35 call and the JUL 40 call expire in the money. With his long JUL 40 call worth $500 and the initial credit of $300 received to offset the short JUL 35 call valued at $1000, there is still a net loss of $200. This is the maximum possible loss and is suffered when the underlying stock price at expiration is anywhere between $40 and $50.

Note: While we have covered the use of this strategy with reference to stock options, the short condor is equally applicable using ETF options, index options as well as options on futures.

Commissions

Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the short condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.

If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the short condor in that they are also high volatility strategies that have limited profit potential and limited risk.

Short Put Butterfly
Short Butterfly
Reverse Iron Condor

The Long Condor

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

Wingspreads

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

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