Short Call Condor Strategy

Overview

A Short Call Condor is very similar to a short butterfly strategy. The difference is that the two middle bought options have different strikes. The strategy is suitable in a volatile market.

The Short Call Condor involves selling 1 ITM Call (lower strike), buying 1 ITM Call (lower middle), buying 1 OTM call (higher middle) and selling 1 OTM Call (higher strike). The resulting position is profitable if the stock/index shows very high volatility and there is a big move in the stock/ index. The maximum profits occur if the stock/index finishes on either side of the upper or lower strike prices at expiration.

When to Use: When an investor believes that the underlying market will break out of a trading range but is not sure in which direction.

Reward: Limited. The maximum profit of a short condor occurs when the underlying stock  or index is trading past the upper or lower strike prices.

Break Even Point:

Upper Break even Point=Highest Strike—Net Credit

Lower Break even point=Lowest Strike+Net Credit

Example

Nifty is at 3600. Mr. XYZ expects high volatility in the Nifty and expects the market to break open significantly on any side. Mr. XYZ sells 1 ITM Nifty Call Options with a strike price of Rs. 3400 at a premium of Rs. 41.25, buys 1 ITM Nifty Call Option with a strike price of Rs. 3500 at a premium of Rs. 26, buys 1 OTM Nifty Call Option with a strike price of Rs. 3700 at a premium of Rs. 9.80 and sells 1 OTM Nifty Call Option with a strike price of Rs. 3800 at a premium of Rs. 6.00. The Net credit is of Rs. 11.45.