Compare Strategies:

Short Condor (Short Call Condor) Options Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Sunday, July 21, 2019

Short Condor (Short Call Condor)

Short Condor (Short Call Condor) Options Strategy

Strategy LevelAdvance
Instruments TradedCall
Number of Positions4
Market ViewVolatile
Risk ProfileLimited
Reward ProfileLimited
Breakeven Point

A Short Call Condor (or Short Condor) is a neutral strategy with a limited risk and a limited profit. The short condor strategy is suitable for a high volatile underlying.

The goal of this strategy is to profit from a stock price moving up or down beyond the highest or lowest strike prices of the position.

The strategy is similar to Short Call Butterfly strategy with the difference being in the strike prices selected.

Suppose Nifty is currently trading at 10,400. If the trader is expecting high volatility in the index due to specific events i.e. budget, results, and elections, he could choose the Short Condor strategy to profit in such a market scenario. The strategy could be constructed as below:

Short Condor Options Strategy
OrdersExample NIFTY Strike Price
Buy 1 ITM CallNIFTY18APR10200CE
Sell 1 ITM Call (Lower Strike)NIFTY18APR10100CE
Buy 1 OTM CallNIFTY18APR10500PE
Sell 1 OTM Call (Higher Strike)NIFTY18APR10600PE

In Short Condor, a Bear Call Spread and a Bull Call Spread combined into 1 strategy as shown in above example. The trader enters in this strategy by buying a lower strike ITM call, selling an even lower striking ITM call, buying a higher strike OTM call and selling another even higher striking OTM call.

The Net credit of the premium is the maximum possible profit in this strategy. The maximum loss is equal to the difference in strike prices of the 2 lower striking calls less the initial credit taken to enter the trade.

Note:

  • Bear Call Spread meaning 2 calls. This includes sell 1 ITM Call and simultaneous buy one ITM Call (on the same underlying) with the same expiration date but a higher strike price.
  • Bull Call Spread meaning 2 calls. This includes buy 1 OTM Call, and the simultaneous sale of another OTM Call (on the same underlying) with the same expiration date but a higher strike price.
  • ITM is 'In the money' and OTM is 'Out of the money'. For Nifty Spot Price at 10550, the 10400 Call Option is ITM and 10700 Call is OTM.

When to use Short Condor (Short Call Condor) strategy?

The Short Call Condor works well when you expect the price of the underlying to be very volatile. In other words, when the trader is anticipating massive price movements (in any direction) in the underlying during the lifetime of the options.

Example

Short Condor Example 1

Let's take a simple example of an underlying stock trading at ₹45 (spot price) in June. The option contracts for this stock are available at the following premium:

  • July 35 Call - ₹11
  • July 40 Call - ₹7
  • July 50 Call - ₹2
  • July 55 Call - ₹1

Lot size: 100 shares in 1 lot

  1. Sell 1 ITM Call

    Sell July 35 Call = ₹11*100 = ₹1100

  2. Buy 1 ITM Call (Higher Strike)

    Buy July 40 Call = ₹7 * 100 = ₹700

  3. Buy 1 OTM Call (Higher Strike)

    Buy July 50 Call = ₹2 * 100 = ₹200

  4. Sell 1 OTM Call

    Sell July 55 Call = ₹1 * 100 = ₹100

Net Credit of Premium = 1100-700+100-200 = ₹300

Maximum Possible Profit = Net Credit of Premium = ₹300

Scenario 1: Stock price goes down to ₹35

At this price all options expires worthless. Thus the net profit is ₹300 which was received at the time of buying the strategy.

Scenario 2: Stock price reaches to ₹55

July 35 Call (Short) = (35-55)*100 = -₹2000

July 40 Call (Long) = (55-40)*100 = +₹1500

July 55 Call (Short) = ₹0

July 50 Call (Long) = (55-50)*100 = +₹500

Net Position = -2000+1500+0+500= ₹0

Initial Credit: ₹300

Maximum Profit: ₹300 paid as net credit of premium at the time of buying the strategy.

Scenario 3: Stock price remain at ₹45

July 35 Call (Short) = (35-45)*100 = -₹1000

July 40 Call (Long) = (45-40)*100 = +₹500

Initial Credit: +₹300

Net Profit (₹) = -1000+500+300 = -200

In this example, the maximum loss is suffered if the underlying stock price at expiration is anywhere between ₹40 and ₹50. Price movement outside the range ₹40 - ₹50 in any direction makes this trade to result in profits.

Example 2 - Bank Nifty

Short Call Condor Example Bank Nifty
Spot Price8900
Lot Size25
Short Call Condor Options Strategy
Strike Price(₹)Premium(₹)Premium Paid(₹)
Sell 1 ITM Call (Lower Strike)870058014500
Buy 1 ITM Call880052013000
Buy 1 OTM Call900042010500
Sell 1 OTM Call (Higher Strike)91003809500
Net Premium(580-520-420+380)
20
(20*25)
500
Upper Breakeven(₹)Strike Price of Highest Strike Short Call - Net Premium Paid
(9100-20)
9080
Lower Breakeven(₹)Strike Price of Lowest Strike Short Call + Net Premium Paid
(8700+20)
8720
Maximum Possible Profit(₹)Net Premium Paid500
Net Payoff from position
On Expiry Bank NIFTY closes at1 Short ITM Call (Lower Strike) (₹)1 Long ITM Call (₹)1 Long OTM Call (₹)1 Short OTM Call (Higher Strike) (₹)Net Payoff (₹)
840014500-13000-105009500500
860014500-13000-105009500500
872014000-13000-1050095000
880012000-13000-105009500-2000
90007000-8000-105009500-2000
90805000-6000-850095000
92002000-3000-55007000500
9400-30002000-5002000500

Market View - Volatile

When you are unsure about the direction in the movement in the price of the underlying but are expecting high volatility in it in the near future.

Actions

Buy ITM Call Option + Buy OTM Call Option + Sell Deep OTM Call Option + Sell Deep ITM Call Option

Suppose Nifty is trading at 10,400. If you expect high volatility in the Nifty in the coming days then you can execute Short Call Condor by selling 1 ITM Nifty Call at 10,200, buying 1 ITM Call at 10,300, buying 1 OTM Call Option at 10, 500 and selling 1 OTM Nifty Call at 10, 600. Your maximum loss will be if Nifty closes in the range of 10,300 to 10,500 on expiry while maximum profit will be on either side of upper or lower strikes.

Risk Profile of Short Condor (Short Call Condor)

Limited

This is a limited risk strategy. The maximum risk in a short call condor strategy is calculated as below:

Max Loss = Strike Price of Lower Strike Long Call - Strike Price of Lower Strike Short Call - Net Premium Received + Commissions Paid

The max risk is when the price of the underlying remains in between strike price of 2 long calls.

Reward Profile of Short Condor (Short Call Condor)

Limited

The maximum profit in a short call condor strategy is realized when the price of the underlying is trading outside the range at time of expiration.<.p>

Max Profit = Strike Price of Lower Strike Short Call - Strike Price of Lower Strike Long Call - Net Premium Paid

Max Profit Scenario of Short Condor (Short Call Condor)

All options exercised or not exercised

Max Loss Scenario of Short Condor (Short Call Condor)

Both ITM Calls exercised

Advantage of Short Condor (Short Call Condor)

It allows you to profit from highly volatile underlying assets moving in any direction.

The maximum profit for the condor trade may be low in relation to other trading strategies but it has a comparatively wider profit zone.

Earn profit with little or no investment as you will have a credit of net premiums.

Disadvantage of Short Condor (Short Call Condor)

Strike prices selected may have an impact on the potential of profit.

Brokerage and taxes make a significant impact on the profits from this strategy. The cost of trading increases with the number of legs. This strategy has 4 legs and thus the brokerage cost is higher.

How to exit?

Reverse the trade by selling bought Options and buying back short Options.

Simillar Strategies

Long Put Butterfly, Short Call Condor, Short Strangle

Comments

No comments found. Be the first to post a comment.








Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App