Condor

A condor strategy combines two call spreads or two put spreads; it involves four call legs, or four put legs, all with the same expiration date, generally with consistent distances between strike prices. The strategy gets its name from its 4-part structure, involving the two outer strikes (or "wings") and two inner strikes (representing the "body"). The two inner strikes are typically positioned around the current price of the underlying stock.

Long Condor (Calls)

A long condor using calls can be considered a combination of an in-the-money bull call spread, and an out-of-the-money bear call spread. It is created by purchasing a lower strike Call, selling a lower-middle strike Call, selling a higher-middle strike Call, and purchasing a consecutively higher strike Call, all with the same expiration date. The two middle strikes are typically positioned around the current price of the underlying stock. In order to be considered a standard condor, the 4 strike prices involved should be equidistant.

Example:

• Buy to Open 1 XYZ 01/17/2015 50.00 Call
• Sell to Open 1 XYZ 01/17/2015 55.00 Call
• Sell to Open 1 XYZ 01/17/2015 60.00 Call
• Buy to Open 1 XYZ 01/17/2015 65.00 Call

If the distance between the two middle strikes (the "body") is greater than the distance to the outer strikes (the "wings"), then the position may be considered to be an "albatross" spread.

The cost to purchase the outer strikes typically exceeds the premium received from selling the inner strikes; therefore, a long condor is typically established as a net debit position.

For use when investor anticipates:

• Neutral outlook
• Little to no movement in security price (e.g. sideways channels)
• Low volatility

Financial Characteristics:

• Maximum Loss: Initial Net Debit paid
• Maximum Gain: Difference between middle strike price and outer strike price, less net debit
• Loses value with time

Objective:

• Gain from correctly predicting price range at expiration

EXAMPLE - Long Condor

Assume it is June 26th, 2014, and Rachael, an options trader, has identified XYZ as a stock that she believes will trade within a relatively confined range over the next month. Therefore, Rachael decides that a Long Condor is an appropriate strategy given her neutral outlook. XYZ is currently trading at $85.41 and she believes, over the next month or so, the stock will trade within a range of approximately $85.00-$88.00. Therefore, Rachael decides that the 85.00 and 87.50 Calls are appropriate middle strike prices. In addition, since the distance between these two strikes is $2.50, she feels that the 82.50 and 90.00 strike prices are appropriate outer strike prices. Lastly, Rachael selects the July expiration since it is 24 days away, which is in-line with her timing forecast.

 

Source: StreetSmart Edge

Trade Setup

Here is the breakdown for Rachael's setup and trade:

• Current XYZ Price = $85.41
• Current Ask Price, XYZ 07/19/2014 82.50 Call = $2.97
• Current Bid Price, XYZ 07/19/2014 85.00 Call = $1.21
• Current Bid Price, XYZ 07/19/2014 87.50 Call = $0.42
• Current Ask Price, XYZ 07/19/2014 90.00 Call = $0.20
• Rachael's Trade:
  • Buy to Open 1 XYZ 07/19/2014 82.50 Call @ $2.97
  • Sell to Open 1 XYZ 07/19/2014 85.00 Call @ $1.21
  • Sell to Open 1 XYZ 07/19/2014 87.50 Call @ $0.42
  • Buy to Open 1 XYZ 07/19/2014 90.00 Call @ $0.20
  • Net Debit = $2.97 - $1.21 - $0.42 + $0.20 = $1.54

The Profit/Loss profile for this trade is as follows:

Note: Chart depicts strategy at expiration

• Maximum Gain = ($85.00 - $82.50) - 1.54= $0.96
• Maximum Loss = $1.54
• Lower Break-Even = Lowest Strike Price + Net Debit = $82.50 + $1.54= $84.04
• Upper Break-Even = Highest Strike Price - Net Debit = $90.00 - $1.54 = $88.46

Note: commissions have been excluded to simplify the calculations. Short options can be assigned at any time and therefore option sellers assume the risk of assignment at any point up until and including expiration.

Short Condor (Calls)

A short condor using calls can be considered a combination of an in-the-money bear call spread, and an out-of-the-money bull call spread. It is created by purchasing a lower strike Call, selling a lower-middle strike Call, selling a higher-middle strike Call, and purchasing a consecutively higher strike Call, all with the same expiration date. The two middle strikes are typically positioned around the current price of the underlying stock. In order to be considered a standard condor, the 4 strike prices involved should be equidistant.

Example:

• Sell to Open 1 XYZ 01/17/2015 90.00 Call
• Buy to Open 1 XYZ 01/17/2015 95.00 Call
• Buy to Open 1 XYZ 01/17/2015 100.00 Call
• Sell to Open 1 XYZ 01/17/2015 105.00 Call

If the distance between the two middle strikes (the "body") is greater than the distance to the outer strikes (the "wings"), then the position may be considered to be an "albatross" spread.

The cost to purchase the outer strikes typically exceeds the premium received from selling the inner strikes; therefore, a long condor is typically established as a net debit position.

For use when investor anticipates:

• Significant movement in security price (in either direction)
• Higher volatility

Financial Characteristics:

• Maximum Loss: Difference between lowest strike price and next highest strike price, less net credit
• Maximum Gain: Initial net credit received

Objective:

• Gain from significant change in price of the underlying security (either up or down) by expiration

EXAMPLE - Short Condor

Assume it is June 4th, 2014, and Steve, an options trader, has identified XYZ as a stock that he believes will make either a sharp move higher or lower over the next month. Therefore, Steve decides that a Short Condor is an appropriate strategy, given his outlook and the limited risk that the strategy offers. XYZ is currently trading at $65.98, and Steve decides that the 65.00 and 67.50 strike Calls are appropriate middle strike, since he feels the stock price will move away from these levels. In addition, he is comfortable with selecting 62.50 and 70.00 for the outer strike prices, since he feels confident that the price of XYZ will either be below $62.50 or above $70.00 over the near-term. Lastly, Steve selects the July expiration; it is 46 days away, which he feels will allow enough time for XYZ to make the anticipated move.

 

Source: StreetSmart Edge

Trade Setup

Here is the breakdown for Steve's setup and trade:

• Current XYZ Price = $65.98
• Current Bid Price, XYZ 07/19/2014 62.50 Call = $3.10
• Current Ask Price, XYZ 07/19/2014 65.00 Call = $2.04
• Current Ask Price, XYZ 07/19/2014 67.50 Call = $1.24
• Current Bid Price, XYZ 07/19/2014 70.00 Call = $0.70
• Steve's Trade:
  • Sell to Open 1 XYZ 07/19/2014 62.50 Call @ $3.10
  • Buy to Open 1 XYZ 07/19/2014 65.00 Call @ $2.04
  • Buy to Open 1 XYZ 07/19/2014 87.50 Call @ $1.24
  • Sell to Open 1 XYZ 07/19/2014 90.00 Call @ $0.70
  • Net Credit = $3.10 - $2.04 - $1.24 + $0.70 = $0.52

The Profit/Loss profile for this trade is as follows:

Note: Chart depicts strategy at expiration

• Maximum Gain = $0.52
• Maximum Loss = ($65.00 - $62.50) - $0.52 = $1.98
• Lower Break-Even = Lowest Strike Price + Net Credit = $62.50 + $0.52= $63.02
• Upper Break-Even = Highest Strike Price - Net Credit = $70.00 - $0.52 = $69.48

Note: commissions have been excluded to simplify the calculations. Short options can be assigned at any time and therefore option sellers assume the risk of assignment at any point up until and including expiration.

Commissions, taxes, and transaction costs are not included in any of these strategy discussions, but can affect final outcome and should be considered. Please contact a tax advisor to discuss the tax implications of these strategies. Many of the strategies described herein require the use of a margin account.

Qualified Spreads

With a Qualified Spread, the purchased option is required to expire on the same or later expiration date than the option sold. When there is more than one possible way to pair available options in your Account, Schwab has the discretion to determine the spread pairings. Schwab may pair options in a manner that does not produce the lowest possible margin requirements.

Note: For butterfly and condor spreads, each option leg must have the same expiration date to qualify as those types of spreads.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg options strategies will involve multiple commissions. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Member SIPC