Introduction
The condor spread is a neutral options trading strategy that is designed to profit when the price of a security stays with a defined range.
It’s one of the most complex options trading strategies, with a total of four legs involved, but it offers a good deal of flexibility in terms of setting a price range that you can profit from.
The Key Points
Neutral Strategy
Not Suitable for Beginners
Four Transactions (buying and writing call or put options at different strike prices)
Can also use Put Options
Debit Spread (upfront cost)
Medium/High Trading Level Required
When to Use
The condor spread should be used to try and profit from a neutral outlook, when you believe that a security will experience very little volatility and will trade within a specified price range.
It's an alternative to the butterfly spread, which is used for the same purpose, and it allows for greater flexibility in terms of defining the price range that you can profit from.
How to Apply
Applying this strategy requires establishing four legs, and therefore four orders must be placed with your broker.
You can either place these orders at the same time, which is easier, or use legging techniques and place them at different times. The condor spread can be created using either calls or puts, as we have mentioned above.
we have focused on the call condor spread, which requires the following transactions.
Buy deep in the money(ITM) calls.
Write in the money(ITM) calls with a higher strike than above.
Buy far out of the(OTM) money calls.
Write out of the money(OTM) calls with a lower strike than above.
There should be the same number of options in each of the four legs, and the same expiration date should be used.
The decision you need to make is which strikes to use. By using strikes that are close to the current trading price of the security, you will increase the potential profitability of the spread, but you have to reduce the size of the range that you can profit from.
Strikes that are further away from the current price of the security will lower the potential profitability but create a wider range to profit from.
The two legs where you buy options should use strikes that are equidistant from the current trading price: so should the two legs where you write options.
illustrate
Company ABC stock is trading at $50, and your expectation is that the price won't move too far in either direction.
You buy 1 contract (100 options, $4 each) of in the money calls (strike $47) for a $400 cost. This is Leg A.
You write 1 contract (100 options, $2.50 each) of in the money calls (strike $49) for a $250 credit. This is Leg B.
You buy 1 contract (100 options, $.50 each) of out of the money calls (strike $53) for a $50 cost. This is Leg C.
You write 1 contract (100 options, $1.50 each) of out of the money calls (strike $51) for a $150 credit. This is Leg D.
You have created a condor spread for a net debit of $50.
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