Long Call Condor

The Long Call Condor is an advanced options trading strategy used to target a specific trading range for a stock within a relatively narrow price band. This strategy is composed of two long call options at different strikes and two short call options at other strikes, all with the same expiration date. It’s ideal for expecting limited volatility around a particular price level.

The Setup

Imagine you are analyzing DEF Corp, currently trading at $75 per share. Anticipating modest movement in the stock, you could set up a Long Call Condor. Suppose you:

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 options expire in three months.

Who Should Consider It

This strategy is suited for traders who expect the stock to end up near the middle strike prices by expiration but want to protect against the stock moving too far beyond these levels. It's particularly useful during periods of lower volatility when significant price movements are not expected.

Strategy Explained

By setting up a Long Call Condor, you are creating a position that profits most if the stock price closes at expiration around the middle strike prices. The sold calls help offset the cost of the bought calls, which makes this a less expensive strategy than a straightforward long call purchase.

Breakeven Process

There are two breakeven points for the Long Call Condor:

Lower breakeven: Lower strike of bought call + net premium paid
Upper breakeven: Higher strike of 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.

Max 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).

Max 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. The primary risk is the stock moving significantly outside the chosen price range, either above the highest strike or below the lowest strike.

Time Decay

Time decay, or theta, benefits this position as it approaches expiration, assuming the stock price stays between the breakeven points. The value of the options sold will decrease faster than the options bought if the stock price stays 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

The Long Call Condor is a sophisticated strategy best used by traders who wish to profit from a stock trading within a specific range. While it limits potential losses to the net premium paid, it also caps the maximum possible gain. It is an excellent strategy to employ in low-volatility environments where the trader expects little movement outside the chosen range.