Short Call Condor

The Short Call Condor is an advanced options trading strategy used to capitalize on small price movements in the underlying asset. This strategy is similar to the Iron Condor but exclusively uses call options with different strike prices, structured to benefit from low volatility in the underlying asset.

The Setup

Let’s say ABC Corp is trading at $50 per share. To set up 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, for instance, three months from today.

Who Should Consider It

This strategy is suitable for traders who expect little to no movement in the underlying stock's price and are looking to profit from the time decay of options while managing risk with defined maximum losses.

Strategy Explained

In a Short Call Condor, the two sold call options at the middle strike prices generate premium income, while the bought call options at the outer strikes limit the potential losses. The ideal scenario is for the underlying stock's price to remain near the middle strike prices, allowing the sold calls to expire worthless while retaining 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), the 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 results in maximum profit as the premium from the sold calls is retained, and all options expire

worthless.

Max Profit Potential

The maximum profit is the net premium received from setting up the condor. This occurs if the stock price remains between the sold strike prices at expiration.

Max Loss

The maximum loss is limited to the difference between adjacent strikes minus the net premium received. This loss occurs if the stock price moves significantly 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 main risk arises if the stock price moves significantly outside the middle strike prices. While losses are capped due to the long calls at the outer strikes, the strategy is most vulnerable to unexpected large moves in the stock price.

Time Decay

Time decay (theta) is favorable to this strategy. As expiration nears, the value of the short options decays faster than the long options, assuming the stock price remains between the middle strikes.

Implied Volatility

A decrease in implied volatility is beneficial for the Short Call Condor, as it reduces the likelihood of the stock price reaching the breakeven points, thereby favoring the positions of the sold calls.

Conclusion

The Short Call Condor is a strategic option for traders looking to profit from a stable market with limited price changes. It offers a balanced approach with defined risk and reward, making it an appealing choice for traders who wish to exploit small price movements and time decay in a controlled manner.