Long Condor Spread w/Calls

NOTE: Graph details and assumptions…

The animated line depicts the profit and loss of the strategy with 24 days to expiry and attempts to display how it changes as the expiration date approaches. This line is theoretical in nature and may not represent real market conditions.

The strategy

You 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 guys tips

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.

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

  • Buy a call, strike price A
  • Sell a call, strike price B
  • Sell a call, strike price C
  • Buy a call, strike price D
  • Generally, the stock will be between strike price Band strike price C

Who should run it

Veterans and higher

When to run it

Options Playbook image 4

You’re anticipating minimal movement on the stock within a specific time frame.

Break-even at expiration

There are two break-even points:

  • Strike A plus the net debit paid
  • Strike D minus the net debit paid

The sweet spot

You achieve maximum profit if the stock price is anywhere between strike B and strike C at expiration.

Maximum potential profit

Potential profit is limited to strike B minus strike A minus the net debit paid.

Maximum potential loss

Risk is limited to the net debit paid to establish the condor.

Margin requirement

After the trade is paid for, no additional margin is required.

As time goes by

For 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 volatility

After 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.

Recommended

Short Call Spread

A short call spread obligates you to sell the stock at strike price A if the option is assigned but gives you the right to buy stock at strike price B...

Short put spread strategy - Options Playbook
Short Put Spread

A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A....

Long straddle option - Options Playbook
Long Straddle

A long straddle is the best of both worlds, since the call gives you the right to buy the stock at strike price A and the put gives you the right to sell the stock at strike price A. But those rights don’t come cheap...

Long strangle option - Options Playbook
Long Strangle

A long strangle gives you the right to sell the stock at strike price A and the right to buy the stock at strike price B...

Back spread call options - Options Playbook
Back Spread w/Calls

This is an interesting and unusual strategy. Essentially, you’re selling an at-the-money short call spread in order to help pay for the extra out-of-the-money long call at strike B.

Back spread put options - Options Playbook
Back Spread w/Puts

This is an interesting and unusual strategy. Essentially, you’re selling an at-the-money short put spread in order to help pay for the extra out-of-the-money long put at strike A.

Calendar spread options - Options Playbook
Long Calendar Spread w/Calls

When running a calendar spread with calls, you’re selling and buying a call with the same strike price, but the call you buy will have a later expiration date than the call you sell. You’re taking advantage of accelerating time decay on the front-month (shorter-term) call as expiration approaches...

Calendar spread options - Options Playbook
Long Calendar Spread w/Puts

When running a calendar spread with puts, you’re selling and buying a put with the same strike price, but the put you buy will have a later expiration date than the put you sell. You’re taking advantage of accelerating time decay on the front-month (shorter-term) put as expiration approaches...

Diagonal spread options Call - Options Playbook
Diagonal Spread w/Calls

You can think of this as a two-step strategy. It’s a cross between a long calendar spread with calls and a short call spread . It starts out as a time decay play...

Diagonal spread options Put - Options Playbook
Diagonal Spread w/Puts

You can think of this as a two-step strategy. It’s a cross between a long calendar spread with puts and a short put spread . It starts out as a time decay play...

Long butterfly spreads - Options Playbook
Long Butterfly w/Calls

A long call butterfly spread is a combination of a long call spread and a short call spread, with the spreads converging at strike price B.

Long butterfly spreads - Options Playbook
Long Butterfly w/Puts

A long put butterfly spread is a combination of a short put spread and a long put spread , with the spreads converging at strike B...

Long butterfly spreads - Options Playbook
Iron Butterfly

You can think of this strategy as simultaneously running a short put spread and a short call spread with the spreads converging at strike B. Because it’s a combination of short spreads, an iron butterfly can be established for a net credit...

Broken wing butterfly call - Options Playbook
Skip Strike Butterfly w/Calls

You can think of this strategy as embedding a short call spread inside a long call butterfly spread . Essentially, you’re selling the short call spread to help pay for the butterfly. Because establishing those spreads separately would entail both buying and selling a call with strike C, they cancel each other out and it becomes a dead strike...

Broken wing butterfly put - Options Playbook
Skip Strike Butterfly w/Puts

You can think of this strategy as embedding a short put spread inside a long put butterfly spread . Essentially, you’re selling the short put spread to help pay for the butterfly. Because establishing those spreads separately would entail both buying and selling a put with strike B, they cancel each other out and it becomes a dead strike...

Inverse broken wing butterfly call - Options Playbook
Inverse Skip Strike Butterfly w/Calls

You can think of this strategy as a back spread with calls with a twist. Instead of simply running a back spread with calls (sell one call, buy two calls), selling the extra call at strike D helps to reduce the overall cost to establish the trade.

Inverse broken wing butterfly put - Options Playbook
Inverse Skip Strike Butterfly w/Puts

You can think of this strategy as a back spread with puts with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at strike A helps to reduce the overall cost to establish the trade.

Christmas tree spread call - Options Playbook
Christmas Tree Butterfly w/Calls

You can think of this strategy as simultaneously buying one long call spread with strikes A and C and selling two short call spreads with strikes C and D. Because the long call spread skips over strike B...

Christmas tree spread put - Options Playbook
Christmas Tree Butterfly w/Puts

You can think of this strategy as simultaneously buying one long put spread with strikes D and B and selling two short put spreads with strikes B and A. Because the long put spread skips over strike C...

Long call condor spread - Options Playbook
Long Condor Spread w/Calls

You can think of a long condor spread withcalls 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...

Long call condor spread - Options Playbook
Long Condor Spread w/Puts

You can think of put condor spread as simultaneously running an in-the-money short put spread and an out-of-the-money long put spread . Ideally, you want the short put spread to expire worthless, while the long put spread achieves its maximum value with strikes C and D in-the-money.

Long call condor spread - Options Playbook
Iron Condor

You can think of this strategy as simultaneously running an out-of-the-money short put spread and an out-of-the-money short call spread . Some investors consider this to be a more attractive strategy than along condor spread with calls or puts because you receive a net credit into your account right off the bat...