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  Short Condor ( Other Neutral: Long Straddle - Short Straddle - Long Strangle - Short Strangle - Collar - Reversal - Put Ratio Spread

- Long Condor - Conversion - Butterfly - Calendar Spread )

 

Using the same option and stock prices we used for the long butterfly, we can examine a similar position known as a condor.

 

The Short Condor

When your feeling on a stock is that it's about to move one way or the other, but you're not sure which way, the short condor can be an effective strategy. Like the long condor and long butterfly, the short condor is a limited risk, limited reward strategy. In this case, you would buy one 75 call and one 80 call. At the same time, you'd sell one 70 call and one 85 call as a hedge in case the market moved against you. This combination of options creates the short condor. The position is considered "short" because you will collect a credit for making the trade.

 

Note: the same position can be established using puts.

 

With this spread, the maximum profit is limited to the $100 credit received when this trade was initiated. At expiration, if the stock is above $85 or below $70, you'll keep the $100. The $400 maximum loss for this position will occur between $75 and $80 where the profit on the 75 call is more than offset by the loss on the short 70 call. Meanwhile, the 80 and 85 calls would expire worthless.

 

Short Condor

Buy

1 75 Call @ $6.00

$600 (condor body)

Buy

1 80 Call @ $4.00

$400 (condor body)

Sell

1 70 Call @ $9.00

($900) (wing)

Sell

1 80 Call @ $4.00

($200) (wing)

Credit from Trade

($100) ($1,100-$1,000)

 

* The profit/loss above does not factor in commissions, interest, dividend or tax considerations.

 

If you like the idea behind the condor, be sure to check out lo ng butterflies and short iron butterflies. These can be comparable strategies depending on your objectives.

 

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