Long Call Condor Strategy

Overview

A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two middle sold options have different strikes. The profitable area of the pay off profile is wider than that of the Long Butterfly.

The strategy is suitable in a range bound market. The Long Call Condor involves buying 1 ITM Call (lower strike), selling 1 ITM Call ( lower middle), selling 1 OTM call (higher middle) ad buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that the risk is capped on both the sides. The resulting position is profitable if the stock/index remains range bound and shows very little volatility. The maximum profits occur if the stock finishes between the middle strike prices at expiration.

When to use: When an investor believes that the underlying market will trade in a range with low volatility until the options expire.

Risk: Limited to the minimum of the difference between the lower strike call spread minus the the higher call spread minus the total premium paid for the condor.

Reward: Limited. The maximum profit of a long condor will be realised when the stock is trading between the two middle strike prices.

Break Even Point:

Upper Breakeven Point= Highest Strike—Net Debit

Lower Breakeven Point= Lowest Strike+Net Debit

Example

Nifty is at 3600. Mr. XYZ expects little volatility in the Nifty and expects the market to remain range bound. Mr. XYZ buys 1 ITM Nifty Call Options with a strike price of Rs. 3400 at a premium  of Rs. 41.25, sells 1 ITM Nifty Call Option with a strike price of Rs. 3500 at a premium of Rs. 26, sells 1 OTM Nifty Call Option with a strike price of Rs. 3700 at a premium of Rs. 9.80 and bus 1 OTM Nifty Call Option with a strike price of Rs. 3800 at a premium of Rs. 6. The Net debit is Rs. 11.45 which is also maximum possible loss.

Strategy: Buy 1 ITM Call Option (Lower Strike), Sell 1 ITM Call Option (Lower Middle), Sell 1 OTM Call Option ( Higher Middle), Buy 1 OTM Call Option (Higher Strike)