Short Call Condor
Direction: Volatility in Either Direction
Strategy Description
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 =
- 1 ITM Short Call + 1 ITM Long Call + 1 OTM Long Call + 1 OTM Short Call OR
- 1 Lower strike Bear Call Spread + 1 Higher Bull Call Spread OR
- Long Strangle with net credit received when the trade is entered but with capped rewarded.
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 Risk:
- Limited to the different in adjacent strikes less net premium collected when the stock is between the two middle strike prices (at expiration).
Maximum Reward :
- Limited to the Net Premium Collected when the underlying stock trade outside the range of strike prices at expiration date.
Breakeven :
- Upside Breakeven = Highest Strike less Net Premium Collected
- Downside Breakeven = Lowest Strike add Net Premium Collected.
- This is typically a net credit trade as you are collecting more premium from the call options sold.
Advantages and Disadvantages
Advantages:
- Collect premium from a volatility trade with no capital outlay.
- Make profit from extremely volatile stocks, without having to determine the direction.
- Limited risk exposure when the underlying stock is between the two middle strike prices on expiration date.
- Usually offer smaller return compare to straddle or strangle strategies with only slightly lower risk exposure.
- Significant movement of the stock and options prices is required for this strategy to be profitable.
- The higher profit potential (compared to Short Call Butterfly) is accompanied with wider range (higher probability of expiring) between the two middle strikes.
Exiting the Trade
- Offset the position by buying back the call options that you sold and selling the options that you have bought in the first place.
- As the underlying stock fluctuate up and down, advance option traders may choose to unravel the spread leg by leg. In this way, the trader will leave one leg of the spread exposed while he profit from the closure of the other legs.
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
Maximum Risk
= Limited to the different in adjacent strikes less net premium collected
= ($5 - $2.80) * 100 = $220
Maximum Reward
= Net Premium Collected = Premium Collected less Premium Paid
= ($7.10 - $3.60 - $1.00 + $0.30) * 100 = $280
Upside Breakeven
= Highest Strike Price Less Net Premium Collected
= $45 - $2.80 = $42.20
Downside Breakeven
= 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.
Related Strategies
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Short Iron Condor
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Long Strangle
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Long Call Condor
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Next go to another volatility strategy, Short Iron Butterfly, to learn how profit can be make from a volatile stock.
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