Condor Options

The condor option strategy is a limited risk, non-directional option trading strategy that is structured to earn a limited profit when the underlying security is perceived to have little volatility.

Using call options expiring on the same month, the trader can implement a long condor option spread 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 the condor options strategy and a net debit is required to establish the position.

Profit potential

Profit is bounded for the stated stock/index position.

Loss potential

Loss is finite under the stated assumptions, but can be substantial. A stock or nonnegative index cannot fall below zero.

Breakeven points

The breakeven can change depending on which strikes the stock finishes between.

Example

Suppose XYZ stock is trading at $45 in June. An options trader enters a condor trade 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 their 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 their 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 their long JUL 35 call worth $1000 to offset the short JUL 40 call valued at $500 and the initial debit of $300, their net profit comes to $200.

The maximum profit for the condor trade 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.

Commissions

These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.

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.