The Options Strategies » Long Condor Spread w/Calls
Long Condor Spread w/Calls
The StrategyYou can think of a long condor spread with calls as simultaneously running an in-the-money long call spread and an out-of-the-money short call spread. Ideally, you want the short call spread to expire worthless, while the long call spread achieves its maximum value with strikes A and B in-the-money. Typically, the stock will be halfway between strike B and strike C when you construct your spread. If the stock is not in the center at initiation, the strategy will be either bullish or bearish. The distance between strikes A and B is usually the same as the distance between strikes C and D. However, the distance between strikes B and C may vary to give you a wider sweet spot (see Options Guy’s Tips below). You want the stock price to end up somewhere between strike B and strike C at expiration. Condor spreads have a wider sweet spot than the butterflies. But (as always) there’s a tradeoff. In this case, it’s that your potential profit is lower. Options Guy's Tips
Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole. As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility. |
The Setup
NOTE: All options have the same expiration month. Who Should Run ItVeterans and higher When to Run It
Break-even at ExpirationThere are two break-even points:
The Sweet SpotYou achieve maximum profit if the stock price is anywhere between strike B and strike C at expiration. Maximum Potential ProfitPotential profit is limited to strike B minus strike A minus the net debit paid. Maximum Potential LossRisk is limited to the net debit paid to establish the condor. Ally Invest Margin RequirementAfter the trade is paid for, no additional margin is required. As Time Goes ByFor this strategy, time decay is your friend. Ideally, you want the options with strike C and strike D to expire worthless, and the options with strike A and strike B to retain their intrinsic values. Implied VolatilityAfter the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. If the stock is near or between strikes B and C, you want volatility to decrease. Your main concern is the two options you sold at those strikes. A decrease in implied volatility will cause those options to decrease in value, thereby increasing the overall value of the condor. In addition, you want the stock price to remain stable, and a decrease in implied volatility suggests that may be the case. If the stock price is approaching or outside strike A or D, in general you want volatility to increase. An increase in volatility will increase the value of the option you own at the near-the-money strike, while having less effect on the short options at strikes B and C. |
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You may wish to consider ensuring that strike B and strike C are around one standard deviation away from the stock price at initiation. That will increase your probability of success. However, the further these strike prices are from the current stock price, the lower the potential profit will be from this strategy.
You’re anticipating minimal movement on the stock within a specific time frame.
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