A total of 4 legs are involved in the condor options strategy and a net debit is required to establish the position. Maximum profit for the long condor option strategy is achieved when the stock price falls between the 2 middle strikes at expiration.
It can be derived that the maximum profit is equal to the difference in strike prices of the 2 lower striking calls less the initial debit taken to enter the trade. The maximum possible loss for a long condor option strategy is equal to the initial debit taken when entering the trade. It happens when the underlying stock price on expiration date is at or below the lowest strike price and also occurs when the stock price is at or above the highest strike price of all the options involved.
There are 2 break-even points for the condor position. The breakeven points can be calculated using the following formulae. The maximum profit for the condor trade may be low in relation to other trading strategies but it has a comparatively wider profit zone. Note: While we have covered the use of this strategy with reference to stock options, the condor is equally applicable using ETF options, index options as well as options on futures.
Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse. The following strategies are similar to the condor in that they are also low volatility strategies that have limited profit potential and limited risk.
The converse strategy to the long condor is the short condor. Short condor spreads are used when one perceives the volatility of the price of the underlying stock to be high. There exists a slightly different version of the long condor strategy which is known as the iron condor. It is entered with a credit instead of a debit and involve less commission charges.
The condor spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable.
For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date A short condor seeks to profit from high volatility and a sizable move in the underlying asset in either direction.
The purpose of a condor strategy is to reduce risk, but that comes with reduced profit potential and the costs associated with trading several options legs. Condor spreads are similar to butterfly spreads because they profit from the same conditions in the underlying asset. The major difference is the maximum profit zone, or sweet spot, for a condor is much wider than that for a butterfly, although the trade-off is a lower profit potential.
Both strategies use four options, either all calls or all puts. For example, a long condor using calls is the same as running both an in-the-money long call, or bull call spread , and an out-of-the-money short call, or bear call spread. Unlike a long butterfly spread , the two sub-strategies have four strike prices, instead of three.
Maximum profit is achieved when the short call spread expires worthless, while the underlying asset closes at or above the higher strike price in the long call spread. At inception, the underlying asset should be close to the middle of strike B and strike C. If it is not at the middle, then the strategy takes on a slightly bullish or bearish bent.
Note that for a long butterfly, strikes B and C would be the same. The profit curve is the same as for the long condor with calls. The profit curve is the same as for the short condor with calls. The goal is to profit from the projected low volatility and neutral price action in the underlying asset. Maximum profit is realized when the underlying asset's price falls between the two middle strikes at expiration minus cost to implement the strategy and commissions.
Two breakeven points BEP : BEP1, where the cost to implement is added to the lowest strike price, and BEP2, where the cost to implement is subtracted from the highest strike price. The goal is to profit from the projected high volatility and the underlying asset's price moving beyond the highest or lowest strikes. Maximum risk is the difference between middle strike prices at expiration minus the cost to implement, in this case a net CREDIT, and commissions.
Two breakeven points BEP - BEP1, where the cost to implement is added to the lowest strike price, and BEP2, where the cost to implement is subtracted from the highest strike price. Advanced Options Trading Concepts. Finra Exams. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
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