Short Condor Explained

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Long Condor (Long Call Condor) Options Trading Strategy Explained

Published on Thursday, April 19, 2020 | Modified on Wednesday, June 5, 2020

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Long Condor (Long Call Condor) Options Strategy

Strategy Level Advance
Instruments Traded Call
Number of Positions 4
Market View Neutral
Risk Profile Limited
Reward Profile Limited
Breakeven Point

A Long Call Condor is a neutral market view strategy with a limited risk and a limited profit. The long call condor investor is looking for little or no movement in the underlying.

It is a 4 leg strategy which involves buying 2 ITM Calls and 2 OTM Calls at different strike price with the same expiry date. The strategy is similar as long butterfly strategy with the difference being in the strike prices selected.

Suppose Nifty is currently trading at 10,400. The long call condor strategy can be used if expect very little volatility in the index and market to largely remain range bound. To profit in such a market scenario lets:

Long Call Condor Options Strategy

The Net debit of premium is the maximum possible loss while the maximum profit will be when Nifty is between the strike prices of 2 short calls on expiry.

When to use Long Condor (Long Call Condor) strategy?

The Long Call Condor works well when you expect the price of the underlying to be range bound in the coming days. In other words, when the trader is anticipating minimal price movement in the underlying during the lifetime of the options.

Example

Long Condor Example 1

Let’s take a simple example of a stock trading at в‚№45 (spot price) in June with the lot size of 100 shares in 1 lot. The option contracts for this stock are available at the following premium:

  • July 35 Call – в‚№11
  • July 40 Call – в‚№7
  • July 50 Call – в‚№2
  • July 55 Call – в‚№1
  1. Buy 1 ITM Call

    Buy July 35 Call = в‚№11*100 = в‚№1100

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    Sell 1 ITM Call (Higher Strike)

    Sell July 40 Call = в‚№7 * 100 = в‚№700

    Buy 1 OTM Call (Higher Strike)

    Buy July 55 Call = в‚№1 * 100 = в‚№100

    Sell 1 OTM Call

    Sell July 50 Call = в‚№2 * 100 = в‚№200

    Net Debit of Premium = 1100 – 700 + 100 – 200 = в‚№300

    Maximum Possible Loss = Net Debit of Premium = в‚№300

    Scenario 1: Stock price goes down to в‚№35

    At this price all options expires worthless. Thus the net loss is в‚№300 which was paid at the time of buying the strategy.

    Scenario 2: Stock price reaches to в‚№55

    July 35 Call (Long) = (55-35)*100 = в‚№2000

    July 40 Call (Short) = (40-55)*100 = -в‚№1500

    July 55 Call (Long) = в‚№0

    July 50 Call (Short) = (50-55)*100 = -в‚№500

    Net Position = 2000 – 1500 + 0 – 500= в‚№0

    Initial Debit: -в‚№300

    Maximum Loss: в‚№300 paid as net debit of premium at the time of buying the strategy.

    Scenario 3: Stock price remain at в‚№45

    July 35 Call (Long) = (45-35)*100 = в‚№1000

    July 40 Call (Short) = (40-45)*100 = -в‚№500

    Initial Debit: -в‚№300

    Net Profit = в‚№1000 – в‚№500 – в‚№300 = в‚№200

    In this example, the maximum profit is achieved if the underlying stock price at expiration is anywhere between в‚№40 and в‚№50.

    Example 2 – Bank Nifty

Orders Example NIFTY Strike Price
Buy 1 ITM Call NIFTY18APR10200CE
Sell 1 ITM Call (Higher Strike) NIFTY18APR10300CE
Sell 1 OTM Call NIFTY18APR10500PE
Buy 1 OTM Call (Higher Strike) NIFTY18APR10800PE
Long Call Condor Example Bank Nifty
Spot Price 8900
Lot Size 25
Long Call Condor Options Strategy
Strike Price(в‚№) Premium(в‚№) Premium Paid(в‚№)
Buy 1 Deep ITM Call 8700 580 14500
Sell 1 ITM Call 8800 -520 -13000
Sell 1 OTM Call 9000 -420 -10500
Buy 1 Deep OTM Call 9100 380 9500
Net Premium 500
Upper Breakeven(в‚№) Higher Strike price – Net Premium Paid 8600
Lower Breakeven(в‚№) Lower Strike price + Net Premium Paid 9200
Maximum Possible Loss (в‚№) Net Premium Paid 500
On Expiry Bank NIFTY closes at Net Payoff from 1 Deep ITM Call bought (в‚№) 8700 Net Payoff from 1 ITM Call sold (в‚№) 8800 Net Payoff from 1 OTM Call sold (в‚№) 9000 Net Payoff from 1 deep OTM call bought (в‚№) 9100 Net Payoff (в‚№)
8400 -14500 13000 10500 -9500 -500
8600 -14500 13000 10500 -9500 -500
8720 -14000 13000 10500 -9500 0
8800 -12000 13000 10500 -9500 2000
9000 -7000 8000 10500 -9500 2000
9080 -5000 6000 8500 -9500 0
9200 -2000 3000 5500 -7000 -500
9400 3000 -2000 500 -2000 -500

Market View – Neutral

When you are unsure about the direction in the movement in the price of the underlying but are expecting little volatility in it in the near future.

Actions

  • Buy Deep ITM Call Option
  • Buy Deep OTM Call Option
  • Sell ITM Call Option
  • Sell OTM Call Option

Suppose Nifty is currently trading at 10,400. You expect little volatility in the index and market to largely remain range bound. To profit in such a market scenario, you can buy buy 1 ITM Nifty Call Option at 10,200, sells 1 ITM Nifty Call Option 10,300, sell 1 OTM Call Option at 10,500 and buy 1 OTM Nifty Call Option at 10,800. The Net debit of premium is the maximum possible loss while your maximum profit will be when Nifty is between the strike prices of 2 short calls on expiry.

Risk Profile of Long Condor (Long Call Condor)

Limited

The maximum risk in a long call condor strategy is equal to the net premium paid at the time of entering the trade. The max risk is when the price of the underlying equal to or below the lower strike price or when the underlying price is equal to or above the higher strike price of Options in trade at expiration time.

Reward Profile of Long Condor (Long Call Condor)

Limited

The maximum profit in a long call condor strategy is realized when the price of the underlying is trading between the two middle strikes at time of expiration.

Max Profit Scenario of Long Condor (Long Call Condor)

Both ITM Calls exercised

Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Lower Strike Long Call – Net Premium Paid

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Reference ID: #7570ffd0-79b6-11ea-84b7-e53253b8f4a2

Iron Condor Strategies: A Way to Spread Your Options Trading Wings

Vertical spreads are fairly versatile when making a directional stance. But what if you’re stuck in a range-bound market? Consider the iron condor.

Key Takeaways

  • A short iron condor options position combines a short out-of-the-money put spread and a short out-of-the-money call spread
  • To profit from a short iron condor, the underlying stock must stay within a range of prices until expiration or until the spread is closed out
  • Because an iron condor has four legs, it’s important to consider transaction costs

Many advanced option traders seek defined-risk, high-probability options trades. With options trading, active traders understand it’s impractical to expect every trade to be profitable. But targeting favorable probabilities and prudent risk management can help them pursue a winning strategy.

Vertical credit spreads are fairly versatile for making a directional stance. Selling a put vertical spread would be a bullish trade. Selling a call vertical spread would be a bearish trade. Plus, when selling verticals, your risk is defined: It’s limited to the width of the long and short strikes, minus the premium collected (and minus transaction costs). But what if your viewpoint is neutral, or if the underlying stock seems stuck in a range-bound market? Enter the iron condor.

The following, like all of our strategy discussions, is strictly for educational purposes. It is not, and should not be considered, individualized advice or a recommendation.

Iron Condor: What’s in a Name?

Don’t be intimidated by this options strategy. Sure, it sounds like a high school garage band name, or maybe a video game “super boss.” But when you open up the hood of the iron condor strategy, it’s really a combination of two fairly basic options strategies, coupled with one awesome-sounding name.

The iron condor is what you get when you combine an out-of-the-money (OTM) short put spread (bullish strategy) and an OTM short call spread (bearish strategy) using options that all expire on the same date. See figure 1 for the risk profile.

By selling two different OTM vertical spreads, you’re collecting the premiums from both sides of the iron condor as one order. But the market can’t be in two places at once. So at expiration, only one spread can go against you.

It sounds like you’re able to bring in the premium for two spreads without increasing your risk, right? Well, yes and no. Let’s look at an iron condor example to help explain.

Iron Condor Example

Suppose a stock is trading at $112 and you sell the 110-105 put spread and the 115-120 call spread, as an iron condor, for a credit of $2.59. The maximum risk on either spread is $5 – $2.59, or $2.41 per spread (which is really $241 for a one-contract spread) plus transaction costs. At expiration, if the stock is above $110 and below $115, then both spreads expire worthless and you keep the $2.59 ($259 per spread) as the profit (minus transaction costs).

Yes, the maximum loss potential is $2.41 for either the put spread or the call spread, so you haven’t increased your dollar risk by selling both spreads. But you have increased the risk of loss in terms of where the market can go for that loss to happen. For instance, if you had sold just the put spread, then the stock could go to $125 at expiration without you worrying. Or, if you sold just the call spread, the stock dropping to $100 wouldn’t be an issue.

The iron condor’s success depends on the market staying within a range of prices. How might you decide on the range, or the strike prices, for a given underlying? Figure 2 shows the spread described above with 48 days until expiration. The light gray portion in the middle of the risk graph highlights the “one standard deviation” expected range based on the current level of the implied volatility. That’s just a fancy way of saying that, based on current options prices, it’s expected that about 68% of the time the stock will stay within this range until expiration. But that’s an expectation. In the real world, anything can happen.

Choosing Strikes for an Iron Condor? Consider the Standard Deviation

Note that in this example the standard deviation falls outside the point of maximum loss. That’s not to say this spread has a high chance of losing money, but rather, such a move wouldn’t be out of the ordinary. Looking for a narrower standard deviation relative to the max profit and loss? Consider an iron condor with fewer days until expiration or one with tighter strike widths. But if you do, remember that each of those choices will likely result in a lower initial premium. Plus, because it’s a spread with four legs, it comes with four commission charges.

Alternatively, if you think the market is going to either stay in a tight range or move in a certain direction, then a basic short vertical spread might be the strategy to go with. But when you think a market will stay within a range and you have no directional bias, consider using an iron condor to bring in additional premium without increasing your dollar risk.

Options strategies are about trade-offs, and it all comes down to your objectives and risk tolerance.

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Short Condor (Iron Condor)

Net Position (at expiration)

EXAMPLE
Long 1 XYZ 70 call
Short 1 XYZ 65 call
Short 1 XYZ 55 put
Long 1 XYZ 50 put

MAXIMUM GAIN
Net premium received

MAXIMUM LOSS
(High call strike – low call strike) OR (High put strike- low put strike) – net premium received

Description

To construct a short condor, the investor sells one call while buying another call with a higher strike and sells one put while buying another put with a lower strike. Typically, the call strikes are above and the put strikes below the current level of underlying stock, and the distance between the call strikes equals the distance between the put strikes. All the options must be of the same expiration.

An alternative way to think about this strategy is as a short strangle and long an even wider strangle. It could also be considered as a bear call spread and a bull put spread.

Outlook

The investor is hoping for underlying stock to trade in narrow range during the life of the options.

Summary

This strategy profits if the underlying stock is inside the inner wings at expiration.

Motivation

The investor hopes the underlying stock will stay within a certain range by expiration.

Variations

This strategy is a variation of the short iron butterfly. Instead of a body and two wings, the body has been split into two different strikes so that there are two shoulders in the middle and two wingtips outside the shoulders.

Max Loss

The maximum loss would occur should the underlying stock be above the upper call strike or below the lower put strike at expiration. In that case either both calls or both puts would be in-the-money. The loss would be the difference between either the call strikes or the put strikes (whichever are in-the-money), less the premium received for initiating the position.

Max Gain

The maximum gain would occur should the underlying stock be between the lower call strike and upper put strike at expiration. In that case all the options would expire worthless, and the premium received to initiate the position could be pocketed.

Profit/Loss

The potential profit and loss are both very limited. In essence, a condor at expiration has a minimum value of zero and a maximum value equal to the span of either wing. An investor who sells a condor receives a premium somewhere between the minimum and maximum value, and profits if the condor’s value moves toward the minimum as expiration approaches.

Breakeven

This strategy breaks even if at expiration the underlying stock is either above the lower call strike or below the upper put strike by the amount of the premium received to initiate the position.

Upside breakeven = lower call strike + premiums received

Downside breakeven = upper put strike – premiums received

Volatility

An increase in implied volatility, all other things equal, would have a negative impact on this strategy.

Time Decay

The passage of time, all other things equal, will have a positive effect on this strategy.

Assignment Risk

The short options that form the shoulders of the condor’s wings are subject to exercise at any time, while the investor decides if and when to exercise the wingtips. If an early exercise occurs at either shoulder, the investor can choose whether to close out the resulting position in the market or to exercise the appropriate wingtip.

It is possible, however, that the underlying stock will be outside the wingtips and the investor will want to exercise one of their shoulders, thereby locking in the maximum loss. In addition, the other half of the position would remain, with the potential to go against the investor and create still further losses. Exercising an option to close out a position resulting from assignment on a short option will require borrowing or financing stock for one business day.

And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as a merger, takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of options on the stock.

Expiration Risk

If at expiration the stock is trading near either shoulder the investor would face uncertainty as to whether or not they would be assigned. Should the exercise activity be other than expected, the investor could be unexpectedly long or short the stock on the Monday following expiration and hence subject to an adverse move over the weekend.

Comments

Related Position

Comparable Position: N/A

Opposite Position: Long Condor

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