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.
|Sell 1 ITM Call|
Buy 1 ITM Call (Lower Strike)
Sell 1 OTM Call
Buy 1 OTM Call (Higher Strike)
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.
Maximum profit for the long condor option strategy 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:
The maximum possible loss for a long condor option strategy 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:
There are 2 break-even points for the condor position. The breakeven points can be calculated using the following formulae.
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 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 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.
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 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).
The following strategies are similar to the condor in that they are also low volatility strategies that have limited profit potential and limited risk.
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.
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.
The condor spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures.
Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.
Once you start trading for real, all trades done in the first 60 days will be commission-free up to $1000! This is a limited time offer. Act now!Click here to open a trading account at OptionsHouse.com now!
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®.... [Read on...]
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide.com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.