Short Call Condor is one of the volatility strategies employed in a highly volatile stock. It is usually a four-legged spread option strategy consisting of all calls with the same expiration date but different strike prices. It is similar to a Short Call Butterfly strategy except that a condor has two middle strike prices instead of one. Typically the distance between each strike prices are equal for this strategy.
Short Call Condor =
Outlook: With this stock option trading strategy, your outlook is directional neutral.
You are expecting an increase in volatility of the underlying stock moving in either direction.
Risk and Reward
Maximum Reward :
Advantages and Disadvantages
Exiting the Trade
Short Call Condor Example
Assumption: XYZ is trading at $36.70 a share on Mar 20X1. The result of the company’s earning announcement is expected to be made soon. You are expecting share price of XYZ to soar up or plummet down once the announcement is made. You would like to profit from the volatility outlook of this stock without any capital outlay (as compare to Long Strangle) and a lower risk exposure (as compare to Short Call Butterfly).
In this case, you may consider to sell one $30 strike call at $7.10, buy one $35 strike call at $3.60, buy one $40 strike call at $1 and sell one $45 strike call at $0.30, all expiring in Jun 20X1, to profit from the volatile outlook of the stock. Note: commissions are NOT taken into account in the calculation.
Analysis of Short Call Condor Example
= Limited to the different in adjacent strikes less net premium collected
= ($5 - $2.80) * 100 = $220
= Net Premium Collected = Premium Collected less Premium Paid
= ($7.10 - $3.60 - $1.00 + $0.30) * 100 = $280
= Highest Strike Price Less Net Premium Collected
= $45 - $2.80 = $42.20
= Lowest Strike Price Add Net Premium Collected
= $30 + $2.80 = $32.80
A Short Call Condor is similar to a Short Call Butterfly strategy and consist of call options. It gets the name from the shape of its profit and loss graph at expiration. The 2 outside strike are commonly referred to as the wing, whereas the 2 middle strikes are commonly referred to as the body. It is the opposite of Long Call Condor, which is a sideway strategy.
The Short Call Condor can be used when the underlying stock is hovering near its equilibrium level and a sharp move in either direction is anticipated. Usually a higher credit is received from the Short Condor in comparison to a Short Butterfly strategy. This is due to the deeper In The Money options that the Short Condor is begin with.
A Short Condor strategy is profitable only if there is a big move from the underlying stock. However, the stock needs to move in a wider range compare to Short Strangle in order to breakeven. Therefore it is usually not a popular volatility strategy among by option traders.
Typically when you short a condor, you will receive credit from the trade. This will be your maximum profit at expiration when the underlying stock close below the lowest strike or above the highest strike. The maximum loss will occur when the underlying stock close between the two middle strike prices at expiration day.
Time decay is generally harmful to this strategy as you need a lot of
movement in the underlying stock for the trade to be profitable.
Once it is in a profitable position, time decay will become helpful.
Therefore it is preferably to use this option trading strategy with at least 3 months left to expiration so as to give yourself more time to be right
You may also execute the Short Condor strategy using all puts options. When all puts options are used, it is referred to as the Short Put Condor strategy. The characteristic of Short Put Condor is the same as a Short Call Condor. As to whether a condor strategy should be executed using all calls or all puts options depend on the relative price of the option. The premium of both puts and calls option should be taken into consideration to achieve the optimum trade.
You should pick the strike price and time frame of the Short Call Condor according to your risk/reward tolerance and forecast outlook of the underlying stock. Having the patient to wait, knowledge to apply and discipline to follow through the option trading strategies with appropriate risk-reward parameters is important to your long term success in option trading.
Short Iron Condor
Long Call Condor