Innovated Tips from Better Trades

Example	Increase in Volatility	Time Erosion
??Buy 1 Call (in-the-money) ??Sell 2 Calls (at consecutive strikes near the money) ??Buy 1 call (out-of-the-money)	hurts position	helps position

The Long Condor

The condor takes the body of the butterfly - two options at the middle strike - and splits it between two middle strikes rather than just one. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three.

Long (Buy) 70 Call
Short (Sell) 75 Call
Short (Sell) 80 Call
Long (Buy) 85 Call

You can also view a condor as a combination of a bull and bear call spread.

Long (buy) 70 call, short (sell) 75 call (bull call spread)
Short (sell) 80 call, long (buy) 85 call (bear call spread)

The long condor can be a great strategy to use when your feeling on a stock is generally neutral because it's been trading in a narrow range. Like the butterfly, the condor is a limited risk, limited reward strategy that profits in stagnant markets.

Imagine that a stock trading at $75 has been relatively flat for some time. If you think the situation is unlikely to change, you can sell one 75 call and one 80 call. At the same time, you'd buy one 70 call and one 85 call as a hedge in case the market moved against you. This combination of options creates the long condor. The position is considered "long" because it requires a net cash outlay to initiate.

Stock: $75

Sell: One 75 call @ $6 for a credit of $600 (condor body)
Sell: One 80 call @ $4 for a credit of $400 (condor body)
Buy: One 70 call @ $9 for a debit of $900 (one wing)
Buy: One 85 call @ $2 for a debit of $200 (other wing)

Total Credits: $1,000
Total Debits: $1,100
Net Debit or Cost of Position: $100 ($1,100 - 1,000)

Note: The same position can be established using puts.

In this case, the maximum profit is achieved at expiration with the stock between 75 and 80. At $75, the 75, 80, and 85 calls would expire worthless and the 70 calls would be worth $500. Thus, you would achieve your maximum profit of $400 ($500 - $100 initial debit). Between 75 and 80, the loss on the short 75 calls is more than offset by the 70 calls. Since the 80 and 85 calls would again expire worthless, the value at expiration is the same as the value of the 70/75 bull call spread ($5). At any price above $85 or below $70, you would experience the maximum loss of $100.

Value At Expiration

Stock Price	Profit (Loss)	Return on Investment**
$65	(100)	(100%)
$70	(100)	(100%)
$71	0	0%
$75	400	400%
$80	400	400%
$84	0	0%
$85	(100)	(100%)
$90	(100)	(100%)

*The profit/loss above does not factor in commissions, interest or tax considerations.
**The ROI is calculated based on the maximum loss of the position.

Now, let's see what happens when you sell the Condor.

The Short Condor

Example	Increase in Volatility	Time Erosion
??Sell 1 Call (in the money) ??Buy 2 Calls (at consecutive strikes near the money) ??Sell 1 call (out of the money)	helps position	hurts position

When your feeling on a stock is that it's about to move one way or the other, but you're not sure which way, the short condor can be an effective strategy. Like the long condor and long butterfly, the short condor is a limited risk, limited reward strategy. In this case, you would buy one 75 call and one 80 call. At the same time, you'd sell one 70 call and one 85 call as a hedge in case the market moved against you. This combination of options creates the short condor. The position is considered "short" because you will collect a credit for making the trade.

Stock: $75

Buy: One 75 call @ $6 for a debit of $600 (condor body)
Buy: One 80 call @ $4 for a debit of $400 (condor body)
Sell: One 70 call @ $9 for a credit of $900 (one wing)
Sell: One 85 call @ $2 for a credit of $200 (other wing)

Total Credits: $1,100
Total Debits: $1,000

Net Credit: $100 ($1,100 - 1,000)

Note: The same position can be established using puts.

With this spread, the maximum profit is limited to the $100 credit received when this trade was initiated. At expiration, if the stock is above $85 or below $70, you'll keep the $100. The $400 maximum loss for this position will occur between $75 and $80 where the profit on the 75 call is more than offset by the loss on the short 70 call. Meanwhile, the 80 and 85 calls would expire worthless.

Value At Expiration

Stock Price	Profit (Loss)	Return on Investment**
$65	(100)	20%
$70	100	20%
$71	0	0%
$75	(400)	(80%)
$80	(400)	(80%)
$84	0	0%
$85	100	20%
$90	100	20%

*The profit/loss above does not factor in commissions, interest or tax considerations.
**The ROI is calculated based on the maximum loss of the position not including the credit received.

If you like the idea behind the condor, be sure to check out long butterflies and short iron butterflies. These can be comparable strategies depending on your objectives.