The condor option strategy is known as a limited-risk trading strategy that traders implement to earn limited profit from either high or low market volatility.
Depending on the market, they choose between two types of condor spreads - long and short condor spread.
The long condor profits in low volatility environments, when the underlying stock has small movements.
The short condor profits in high volatility environments, when the underlying stock has large movements.
What Is The Condor Options Strategy?
In this post, we will also get into detail about the iron condor strategy and talk about the potential risks and benefits these strategies offer.
Understanding The Condor Options Strategy
The condor spread is a non-directional options trading strategy with the purpose of reducing risk.
It is intended to earn a limited profit when the underlying share has volatility.
The condor is often compared with the butterfly options strategy, as both lead to profit when the underlying asset is under the same conditions.
However, the condor's maximum profit range is much wider than the butterfly one.
Types of Condor Spreads
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Long condor spread with calls
The long call condor is a common four-legged options strategy consisting of four call options with the same expiration date.
The trading strategy involves one long ITM call, one short highest middle-strike ITM call, one short OTM call, and one long highest-strike OTM call.
When to use long condor spread with calls
If you are planning on executing this neutral strategy, the best time to exercise is when you are anticipating minimal to no movement in the underlying stock within a particular set date.
Simply put, this strategy is intended for use when the underlying stock is trading in a narrow range.
When it comes to this method, no additional margin is necessary once you pay the trade.
Maximum potential profit and loss
One thing about the condor is that it enables the trader to limit the risk factor.
This strategy maximizes profit when the underlying price is between the middle strike prices and the expiration date.
In contrast, maximum loss happens when the underlying price is below the lowest strike price and the highest strike price at the expiration date.
The maximum loss using this strategy is limited to the net debit paid.
Break even points
The strategy has two break-even points.
- Upside break even - highest long call strike - premium paid
- Downside break even - lowest long call strike + premium paid
Advantages of the condor strategy
- The strategy limits the risk factor
- It enables you to earn profit even when the market is volatile
- Condor is a neutral direction strategy
Disadvantages of the condor strategy
- The amount to pay for premiums is high due to the four call options
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Long condor spread with puts
The long put condor strategy consists of four different put options that have the same expiration date.
It involves one long OTM put at the lowest strike, one short OTM put at the middle strike, one short put at a higher ITM strike, and one long ITM put at the highest strike.
When to use the long condor with puts
The long condor spread with puts strategy is recommended to be used when you expect less volatility in the underlying stock till the expiry date.
You can profit when the underlying stock is between the two short put strikes at expiration.
Maximum potential profit and loss
This strategy's profit curve works the same way as the long condor with calls. The potential loss regarding this strategy is limited to the net debit paid.
The maximum gain under the long condor spread with puts occurs when the underlying asset expires in between the two short call strikes.
It is the difference between the first and second strike less the net capital outflow.
The maximum loss under long put condor is limited to the net debit paid.
It would occur if the underlying asset were below the lowest long put strike at expiration or at or above the highest long put strike.
Difference between long condor with calls and long condor with puts
Long condor spread with calls refers to running an ITM long call spread and an OTM short call spread at the same time.
Whereas a long condor with puts involves running an ITM short put spread and an OTM long put spread.
In an ideal situation, regarding the long condor spread with calls, the traders want the short call spread to expire worthless, whereas the long call spread to achieve maximum value with strike prices A and B, the in-the-money.
On the other hand, for long condor with puts, the traders want the short put spread to expire worthless, while the long put spread achieves its maximum value with strikes C and D, in-the-money.
When to execute long condor spread with calls and puts
Long condor with calls should be executed when you anticipate less volatility in the underlying asset till the expiry date.
The long call condor works when you expect the price of the underlying asset to be range bound in the following days.
Simply put, implement the long condor spread when you are anticipating minimal price movement in the underlying asset during the lifetime of the options.
The long condor spread with puts is also to be executed when you are anticipating minimal movement on the stock within a particular set time.
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Short condor with calls
The setup for short condor with calls trade includes:
- Selling a call with a strike price A (the lowest strike)
- Buying a call with a strike price B (the second-lowest strike)
- Buying a call with a strike price C (second-highest strike)
- Selling a call with a strike price D (highest strike)
As can be seen, this is a four-part strategy. The short condor with spreads is established for a net credit, meaning that both the potential profit and the maximum risk are limited.
The result of the trade is a net credit to the account of the trader.
When the stock price is below the lowest strike price at the expiration date, all calls expire worthless, and then the trader keeps the net credit as an income.
However, in case the stock price is above the highest strike at expiration, the calls are ITM, and the condor spread position has a value of zero. In this case, the net credit less commissions are kept as an income.
Maximum potential profit and loss
The short condor spread with calls profits when the price of the stock moves above the highest strike or below the lowest strike on the expiration date.
On the contrary, if there is no movement in the price and it stays between the middle strike prices, this is when a loss occurs.
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Short condor with puts
When it comes to the short condor with puts, you need to:
- Sell a put with a strike price A - the lowest strike
- Buy a put with a strike price B - the second lowest
- Buy a put with a strike price C - the second highest
- Sell a put with a strike price D - the highest strike
To establish the short put condor position, as a trader, you need to sell a lower strike short put, while in the middle, there has to be a lower strike OTM long put as well as a higher strike ITM long put.
In the final step, the trader needs to sell a higher strike ITM short put option. The maximum profit is the net credit to the account, while the maximum loss is the difference between the consecutive strike prices.
Maximum potential profit and loss
You will earn maximum gain while implementing this strategy if the underlying price reaches above the higher strike or moves below the lower strike at the expiration date.
A loss occurs when the underlying stock price is either at or between the middle strike prices at the expiration date.
Iron Condor
- Buy a put, strike A
- Sell a put, strike B
- Sell a call, strike C
- Buy a call, strike D
The iron condor is a directionally neutral options trading strategy with four strike prices.
It helps the investors start trading at a limited risk. It combines put and call vertical spreads to create flexible opportunities for investors.
The strategy consists of two call options as well as two put options, each having a different strike price and an expiration date.
The iron condor method is constructed in two ways: a long iron condor and a short iron condor.
The iron condor can only be applied when the stock market is non-volatile.
It maximizes profit when the underlying asset stays between the middle strike prices. Using this strategy, the traders receive money when they sell the options.
When to use the iron condor strategy
This is a strategy to apply when you expect the security price won’t move too much on the market. It is known that when you buy options strategies, you are fighting time decay.
However, instead of doing so, you can make the time decay work for you as a trader and make a profit by trading an iron condor.
This type of strategy relies on the stock to remain within the trading range when the trade is opened until the expiration date.
Maximum potential profit and loss
The maximum profit when it comes to iron condor is the amount of premium received for creating this four-leg options position.
On the other hand, the maximum loss represents the difference between the long and the short call strikes or between the long and short put strikes.
When the price of the stock goes above the long call strike is higher than the sold call strike or goes below the long put strike, this is when a loss occurs.
Advantages of iron condor
- The returns on this strategy can be higher
- There is a fixed level of risk when trading iron condor
- The trader receives credit instead of paying the debit
- It allows you to adjust the losing side
Disadvantages of iron condor
- There is a limited profit potential
- The trading process can be time-consuming
Difference Between Condor Spreads and Iron Condor
The main difference between the condor spreads and the iron condor is that the condor spreads are made of either all call options or all put options, whereas the iron condor consists of both call and puts.
The short iron condor spread is a credit spread, which is not the case with the short condor spread, which is a debit spread.
Moreover, the sold iron condor consists of OTM options, whereas the condor spreads consist of ITM options.
Conclusion
The condor strategy is an effective strategy intended for advanced and experienced traders.
There are many types of condor spreads, allowing you to earn profit without putting in a lot of capital.
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