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.
Sell 1 call at the lowest strike price; Buy 1 call at the second-lowest strike price; Buy 1 call at the second-highest strike price; Sell 1 call at the highest strike price. Use the same expiration date.
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.
Profit potential
Profit is bounded for the stated stock/index position.
Calculate these amounts and use the largest: Zero minus net opening cost; Lowest strike price plus highest strike price minus second-lowest strike price minus second-highest strike price minus net opening cost.
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Loss potential
Loss is finite under the stated assumptions, but can be substantial. A stock or nonnegative index cannot fall below zero.
Second-lowest strike price plus net opening cost minus lowest strike price.
Breakeven points
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Prices at or below the lowest strike price all break even only when the net opening cost equals zero.
- Lowest strike price minus net opening cost. Use this result only if it is between the lowest strike price and the second-lowest strike price.
- Prices between the second-lowest strike price and the second-highest strike price all break even only when the net opening cost equals lowest strike price minus second-lowest strike price.
- Net opening cost plus second-lowest strike price plus second-highest strike price minus lowest strike price. Use this result only if it is between the second-highest strike price and the highest strike price.
- Prices at or above the highest strike price all break even only when the net opening cost equals lowest strike price plus highest strike price minus second-lowest strike price minus second-highest strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
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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, let’s examine what happens when the stock price falls to $35 or rises to $55 on expiration.
At $35, all the options expire worthless, so the initial credit taken of $300 is their 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 their 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.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
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.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
