Condor

Condor is a limited risk, limited reward option trading strategy and is executed when the underlying is perceived to have less volatility. Condor spreads are made up of either all call options or all put options. This is different from iron condor spreads which consist of both call or put options.

 

Condor Construction:

Sell 1 ITM Call

Buy 1 ITM Call (Lower Strike)

Sell 1 OTM Call

Buy 1 OTM Call (Higher Strike)

 

 

 

Suppose XYZ stock is trading at $50 and the lot size of XYZ option contract is 100. A trader enters a condor by buying a call at $40 for $1100, selling a call at $45 for $700, buying another call at $60 at $100 and selling another call at $55 for $200. The net debit required to enter the trade is $300.

 

Case 1:

If the stock is trading at $40 or less, all the options expire worthless. The resulting loss is $300 which is also his initial debit and the maximum loss.
 

Case 2

If the stock is trading at $60, the long 60 call expires worthless while the payoff of long 40 call is worth $2000,  the short 45 call is worth $1500 and the short 55 call is worth $500. Hence the 40 call is used to offset the losses from the short calls. Thus, the trader still suffers the maximum loss that is equal to the $300 initial debit taken when entering the trade. This is the maximum loss is true for the stock price above $60.
 

Case 3:

If the stock is trading in between $45 and $55, say at $50, both the long 40 call and the short 45 call expires in the money. The long 40 call is worth $1000 which offset the short 45 call valued at $500. The net profit, after the initial debit of $300, comes to $200. This profit is true for any price of the stock between $45 and $55.