Short Call Condor

 

Description

 

Short condors are identical to short butterflies, with the exception that the two middle bought options have different strikes. The Short Call Condor is another volatility strategy and is the opposite of a Long Call Condor, which is a rangebound strategy. Short condors are not particularly popular because even though they produce a net credit, they offer very small returns compared to straddles and strangles, with only slightly less risk.

 

The Short Call Condor involves a low strike short call, a lower middle in-the-money  long call, a higher middle out-of-the-money long call, and a higher out-of-the-money short call. The resulting position yields a position that is profitable in the event of a big move by the stock. Again, the problem is that the reward is seriously capped and is typically dwarfed by the potential risk if the stock fails to move.  

 

Market Opinion

 

Direction neutral.

 

P/L

 

 

 

 

 

 

When To Use

 

Use this strategy when you anticipate a significant increase in the volatility of a stock, in either direction, for a capital gain.

 

Example

 

XXXX is trading at $52.87 on May 14, 2011.

Sell August 2011 45 strike call for $10.16.

Buy August 2011 50 strike call at $7.05.

Buy August 2011 55 strike call at $4.70.

Sell August 2011 60 strike call for $3.02.

 

Net credit: premiums sold minus premiums bought: $1.43.

 

Benefit

 

The benefit is that, for no capital outlay, you can get profit from a rangebound stock with capped risk.

 

Risk vs. Reward

 

The risk is the difference between adjacent strikes minus the net credit. The reward is the net credit you receive.

 

Net Upside

 

Net credit received.

 

Net Downside

 

Difference between adjacent strikes minus net credit.

 

Break Even Point

 

Break even up:  highest strike minus net credit.

 Break even down: lowest strike plus net credit.

 

Effect Of Volatility

 

Positive, unless the stock moves outside of the outer strikes.

 

Effect Of Time Decay

 

Negative because you have to wait for a lot of movement in the price of the stock.

 

Alternatives Before Expiration

 

To stem a loss, unravel the trade by selling the options and buying back the options you sold.

 

Alternatives After Expiration

 

Close out the position by buying back the options sold and selling the options bought.