Long Call Condor

 

Description         

 

Long condors are identical to long butterflies, with the exception that the two middle bought options have different strikes. The Long Call Condor is another rangebound strategy and is the opposite of a Short Call Condor, which is a volatility strategy.

 

Long condors are quite popular because they offer a good risk/reward ratio, together with low cost. The long options at the outside strikes ensure that the risk is capped on both sides, and this is a much more conservative strategy than the Short Strangle.

 

The Long Call Condor involves a low strike long call, a lower middle ITM short call, a higher middle out-of-the-money short call, and a higher out-of-the-money long call. The resulting position is profitable in the event of the stock remaining rangebound. Here the risk/reward ratio is attractive, and the profitable area of the risk profile is wider than that of the Long Butterfly.

 

Market Opinion

 

Neutral. You expect very little movement in the price of the stock.

 

P/L

 

 

 

 

 

 

 

When To Use

 

When you expect the price of the stock to move very little, and you want capital gains at a low cost.

 

Example

 

XXXX is trading at $52.87 on May 12, 2011.

Buy June 2011 45 strike call for $8.52.

Sell June 2011 50 strike call for $4.82.

Sell June 2011 55 strike call at $2.34.

Buy June 2011 60 strike call for $0.98.

 

Benefit

 

The benefit is that, for little capital outlay, you can profit from a rangebound stock with capped low risk.

 

Risk vs. Reward

 

The risk is the net debit of the bought and sold options. The reward is the difference between adjacent strikes minus the net debit.

 

Net Upside

 

The difference between adjacent strikes minus net debit.

 

Net Downside

 

The net debit paid.

 

Break Even Point

 

Break even up:  higher strike minus net debit.

 

Break even down: lower strike plus net debit.

 

Effect Of Volatility

 

Minimal effect, low volatility

 

Effect Of Time Decay

 

Positive when the trade is profitable, and negative when it is not profitable. The stock will be profitable when you enter the trade, so from then on time decay is negative.

 

Alternatives Before Expiration

 

To stem a loss, unravel the position.

 

Alternatives After Expiration

 

Close the position by buying back the options sold and selling the options bought.