Condor Spread

What Is a Condor Spread?

A condor spread is a non-directional options strategy that limits the two gains and losses while seeking to profit from one or the other low or high volatility. There are two types of condor spreads. A long condor tries to profit from low volatility and practically no movement in the underlying asset. A short condor tries to profit from high volatility and a sizable move in the underlying asset in one or the other bearing.

Understanding Condor Spreads

The purpose of a condor strategy is to reduce risk, however that accompanies reduced profit potential and the costs associated with trading several options legs. Condor spreads are like butterfly spreads in light of the fact that they profit from similar conditions in the underlying asset. The major difference is the maximum profit zone, or sweet spot, for a condor is a lot more extensive than that for a butterfly, albeit the compromise is a lower profit potential. The two strategies utilize four options, either all calls or all puts.

As a combination strategy, a condor includes different options, with indistinguishable expiration dates, purchased as well as sold simultaneously. For instance, a long condor utilizing calls is equivalent to running both a in-the-money long call, or bull call spread, and a out-of-the-money short call, or bear call spread. Dissimilar to a long butterfly spread, the two sub-strategies have four strike prices, rather than three. Maximum profit is accomplished when the short call spread terminates worthless, while the underlying asset closes at or over the higher strike price in the long call spread.

Types of Condor Spreads

1. Long Condor With Calls

This outcomes in a net DEBIT to account.

• Buy a call with strike price A (the lowest strike):
• Sell a call with strike price B (the second lowest):
• Sell a call with strike price C (the second highest)
• Buy a call with strike price D (the highest strike)

At origin, the underlying asset ought to be close to the middle of strike B and strike C. In the event that it isn't at the middle, then, at that point, the strategy takes on a somewhat bullish or bearish twisted. Note that for a long butterfly, strikes B and C would be something very similar.

2. Long Condor With Puts

This outcomes in a net DEBIT to account.

• Buy a put with strike price A
• Sell a put with strike price B
• Sell a put with strike price C
• Buy a put with strike price D

The profit curve is equivalent to for the long condor with calls.

3. Short Condor With Calls

This outcomes in a net CREDIT to account.

• Sell a call with strike price A (the lowest strike)
• Buy a call with strike price B (the second lowest)
• Buy a call with strike price C (the second highest)
• Sell a call with strike price D (the highest strike)

4. Short Condor With Puts

This outcomes in a net CREDIT to account.

• Sell a put with strike price A (the lowest strike)
• Buy a put with strike price B (the second lowest)
• Buy a put with strike price C (the second highest)
• Sell a put with strike price D (the highest strike)

The profit curve is equivalent to for the short condor with calls.

Illustration of Long Condor Spread With Calls

The goal is to profit from the projected low volatility and neutral price action in the underlying asset. Maximum profit is realized when the underlying asset's price falls between the two middle strikes at expiration minus cost to carry out the strategy and commissions. Maximum risk is the cost of executing the strategy, in this case a net DEBIT, plus commissions. Two breakeven points (BEP): BEP1, where the cost to carry out is added to the lowest strike price, and BEP2, where the cost to execute is deducted from the highest strike price.

• Buy 1 ABC 45 call at 6.00 bringing about a DEBIT of $6.00
• Sell 1 ABC 50 call at 2.50 bringing about a CREDIT of $2.50
• Sell 1 ABC 55 call at 1.50 bringing about a CREDIT of $1.50
• Buy 1 ABC 60 call at 0.45 bringing about a DEBIT of $0.45
• Net DEBIT = ($2.45)
• Maximum Profit = $5 - $2.45 = $2.55 less commissions.
• Maximum Risk = $2.45 plus commissions.

Illustration of Short Condor Spread With Puts

The goal is to profit from the projected high volatility and the underlying asset's price moving past the highest or lowest strikes. Maximum profit is the net CREDIT received from carrying out the strategy minus any commissions. Maximum risk is the difference between middle strike prices at expiration minus the cost to execute, in this case a net CREDIT, and commissions. Two breakeven points (BEP) - BEP1, where the cost to carry out is added to the lowest strike price, and BEP2, where the cost to execute is deducted from the highest strike price.

• Sell 1 ABC 60 put at 6.00 bringing about a CREDIT of $6.00
• Buy 1 ABC 55 put at 2.50 bringing about a DEBIT of $2.50
• Buy 1 ABC 50 put at 1.50 bringing about a DEBIT of $1.50
• Sell 1 ABC 45 put at 0.45 bringing about a CREDIT of $0.45
• Net CREDIT = $2.45
• Maximum Profit = $2.45 less commissions.
• Maximum Risk = $5 - $2.45 = $2.55 plus commissions.

Highlights

• A condor spread is a non-directional options strategy that limits the two gains and losses while seeking to profit from one or the other low or high volatility.
• A condor spread is a combination strategy that includes various options purchased or potentially sold simultaneously.
• A long condor looks to profit from low volatility and practically zero movement in the underlying asset while a short condor tries to profit from high volatility and a large movement in the underlying asset in one or the other bearing.