Short
Call Condor
Description
Short
condors are identical to short butterflies, with the exception that the two
middle bought options have different strikes. The Short Call Condor is another volatility
strategy and is the opposite of a Long Call Condor, which is a rangebound
strategy. Short condors are not particularly popular because even though they
produce a net credit, they offer very small returns compared to straddles and
strangles, with only slightly less risk.
The
Short Call Condor involves a low strike short call, a lower middle
in-the-money long call, a higher middle out-of-the-money long call, and a
higher out-of-the-money short call. The resulting position yields a position
that is profitable in the event of a big move by the stock. Again, the problem
is that the reward is seriously capped and is typically dwarfed by the
potential risk if the stock fails to move.
Market
Opinion
Direction
neutral.
P/L
When
To Use
Use
this strategy when you anticipate a significant increase in the volatility of a
stock, in either direction, for a capital gain.
Example
XXXX
is trading at $52.87 on May 14, 2011.
Sell
August 2011 45 strike call for $10.16.
Buy
August 2011 50 strike call at $7.05.
Buy
August 2011 55 strike call at $4.70.
Sell
August 2011 60 strike call for $3.02.
Net
credit: premiums sold minus premiums bought: $1.43.
Benefit
The
benefit is that, for no capital outlay, you can get profit from a rangebound
stock with capped risk.
Risk
vs. Reward
The
risk is the difference between adjacent strikes minus the net credit. The
reward is the net credit you receive.
Net
Upside
Net
credit received.
Net
Downside
Difference
between adjacent strikes minus net credit.
Break
Even Point
Break
even up: highest strike minus net credit.
Break
even down: lowest strike plus net credit.
Effect
Of Volatility
Positive,
unless the stock moves outside of the outer strikes.
Effect
Of Time Decay
Negative
because you have to wait for a lot of movement in the price of the stock.
Alternatives
Before Expiration
To
stem a loss, unravel the trade by selling the options and buying back the
options you sold.
Alternatives
After Expiration
Close
out the position by buying back the options sold and selling the options
bought.