Short Call Condor

The Short Call Condor Setup

Suppose ABC Corp is trading at $50 per share. To establish a Short Call Condor, you would:

• Buy a call option with a lower strike price, say $45, for $6.
• Sell a call option with a slightly higher strike price, say $50, for $4.
• Sell another call option with an even higher strike price, say $55, for $3.
• Buy a call option with the highest strike price, say $60, for $1.

All options have the same expiration date, say three months from now.

Who Should Consider It

This strategy is appropriate for traders who anticipate little to no price movement in the price of the underlying stock and wish to make money from the time decay of options while hedging risk with specified maximum losses.

Strategy Explained

In a Short Call Condor, the two sold call options at the middle strike prices bring in premium income, and the bought call options at the outer strikes cap the potential losses. The best possible scenario is for the price of the underlying stock to stay close to the middle strike prices, so the sold calls expire worthless while keeping the premiums.

Breakeven Process

The strategy has two breakeven points:

• Upper breakeven: Higher middle strike price + net premium received.
• Lower breakeven: Lower middle strike price - net premium received.

In this example, if the net premium received is $1 ($4 + $3 - $6 - $1), breakeven points are $51 ($50 + $1) and $54 ($55 - $1).

Sweet Spot

The sweet spot for the Short Call Condor is when the stock price at expiration is between the two sold strike prices ($50 and $55 in this example). This gives maximum profit since the premium from the sold calls is kept, and all options expire worthless.

Max Profit Potential

Maximum profit is the net premium received from entering the condor. This is the case if the stock price is between the sold strike prices at expiration.

Max Loss

Maximum loss is limited to the difference between adjacent strikes minus the net premium received. This loss occurs if the stock price moves far above the highest strike or below the lowest strike. In this example, the maximum loss would be $4 per share ($5 difference between strikes - $1 net premium).

Risk

The greatest risk is if the stock price moves far beyond the middle strike prices. Although losses are limited by the long calls at the outer strikes, the strategy is most susceptible to unanticipated large stock price moves.

Time Decay

Time decay (theta) is beneficial to this strategy. As expiration approaches, the value of the short options decays quicker than the long options, given the stock price is between the middle strikes.

Implied Volatility

A decline in implied volatility is beneficial to the Short Call Condor, as this lessens the chances of the stock price hitting the breakeven points, thus favoring the sold call positions.

Conclusion

The Short Call Condor is a strategy that suits a trader who wants to earn from a stable market with minimal price movement. It is a balanced strategy with clear risk and reward, and this makes it very attractive to a trader who wants to earn from minor price movement and time decay in a controlled way.