|
Using the same option and
stock prices we used for the
long butterfly, we can
examine a similar position
known as a condor.
The
Long Condor
The condor takes the body of
the butterfly-two options at
the middle strike-and splits
it between two middle
strikes rather than just
one. In this sense, the
condor is basically a
butterfly stretched over
four strike prices instead
of three.
Long 70 call, Short 75 call
Short 80 call, Long 85 call
You can also view a condor
as a combination of a bull
and bear call spread.
Long 70 call, short 75 call
(bull
call spread)
Short 80 call, long 85 call
(bear
call spread)
The long condor can be a
great strategy to use when
your feeling on a stock is
generally neutral because
it's been trading in a
narrow range. Like the
butterfly, the condor is a
limited risk, limited reward
strategy that profits in
stagnant markets.
Imagine that a stock trading
at $75 has been relatively
flat for some time. If you
think the situation is
unlikely to change, you can
sell one 75 call and one 80
call. At the same time,
you'd buy one 70 call and
one 85 call as a hedge in
case the market moved
against you. This
combination of options
creates the long condor. The
position is considered
"long" because it requires a
net cash outlay to initiate.
|
Long Condor |
|
Sell |
1 75 Call
@ $6.00 |
($600)(condor
body) |
|
Sell |
1 80 Call
@ $4.00 |
($400)(condor
body) |
|
Buy |
1 70 Call
@ $9.00 |
$900(wing) |
|
Buy |
1 85 Call
@ $2.00 |
$200(wing) |
|
Cost of Trade |
$100
($1,100-$1,000) |
* Note: the
same position can be
established using puts.
In this case, the maximum
profit is achieved at
expiration with the stock
between 75 and 80. At $75,
the 75, 80, and 85 calls
would expire worthless and
the 70 calls would be worth
$500. Thus, you would
achieve your maximum profit
of $400 ($500 - $100 initial
debit). Between 75 and 80,
the loss on the short 75
calls is more than offset by
the 70 calls. Since the 80
and 85 calls would again
expire worthless, the value
at expiration is the same as
the value of the 70/75 bull
call spread ($5).
At any price above $85 or
below $70, you would
experience the maximum loss
of $100.
* The profit/loss above does
not factor in commissions,
interest, or tax
considerations.
If you like the idea behind
the condor, be sure to check
out
long butterflies and
short butterflies. These can
be comparable strategies
depending on your
objectives.
Short Condor is an alternate
type of play |
