Long Call Condor

Long Call Condor Setup

Imagine, then, you would be analyzing DEF Corp, which might be traded at around 75. With modest movement in mind, you could initiate a Long Call Condor. Let us say you will:

• Buy a call option with a strike price of 70 for 6.50
• Sell a call option with a strike price of 75 for 4
• Sell another call option with a strike price of 80 for 2.50
• Buy a call option with a strike price of 85 for 1

All these options expire in three months.

Who Is It Suitable For?

A trader expecting the stock to end up with a value near the middle strike prices at expiration but wanting to protect against that stock moving too far beyond these levels will like this option strategy. It represents a good position to take when volatility is low and substantial price movements aren’t anticipated.

How the Strategy Works

By putting on a Long Call Condor, you are taking a position that will profit the most if, at expiration, the stock price is near or at the middle strike prices. The sold calls offset the cost of the bought calls, which makes this a relatively inexpensive option as compared to an outright long call purchase.

Breakeven Points

There will be two breakeven points of the Long Call Condor.

• Lower breakeven: Lower strike of a bought call + net premium paid
• Upper breakeven: Higher strike of a bought call - net premium paid

Sweet Spot

The sweet spot for this strategy is when the stock price finishes at expiration between the two middle strikes ($75 and $80 in this example), where the maximum profit is realized.

Maximum Profit Potential

The maximum profit is the difference between the strike prices of the short calls minus the net cost of setting up the spread (including commissions). For the example, this would be calculated as ($80 - $75 - net premium paid).

Maximum Loss

The maximum loss is limited to the net premium paid to establish the position. This occurs if the stock finishes below the lowest strike or above the highest strike at expiration.

Risk

The risk is limited and defined by the amount spent on the spread: superior price fluctuations exceeding either of the strikes, quite so as to place a substantial loss on the position, will be its primary drawback.

Decay with Time

Time decay or theta favors this position, assuming the stock price remains between breakeven points for the trader moving to expiration. Since short options decay in price quicker than any premiums in bought positions when stock prices stay near the center of the strike prices.

Implied Volatility

Changes in implied volatility can have a mixed impact on this strategy. Since it involves both long and short call positions, an increase in implied volatility can increase the value of the long positions more than the short positions, potentially leading to a net positive effect depending on the exact strikes and stock price.

Conclusion

An advanced strategy, the Long Call Condor can be best understood by traders wanting a stock to remain within a specific range for a profit. While limiting potential losses to the net premium paid, it caps the maximum possible gain. It is an excellent strategy to employ in low-volatility environments where the trader expects.