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Description and use

Condors in the Short Call Condor option are almost similar to the shorted butterflies, but the two middle components have different strike prices. Short Call Condor option is the opposite of Long Call Condor. Despite the net credit investment, it is not popular, because its return is smaller than a Straddle’s or a Strangle’s return. To establish the position, the trader has to sell a lower strike Short Call, in the middle there have to be a lower strike ITM Long Call and a higher strike OTM Long Call, and finally, the trader has to sell a higher strike OTM Short Call option. The investor can profit from shares with large price fluctuations. The disadvantage of this strategy is the limited profit and the maximum loss when share prices are stagnating. The direction of the market is neutral. The investor speculates on shares with high volatility. The potential profit has an upper limit. The expiration should be at least three months.

  • Type: Neutral
  • Transaction type: Credit
  • Maximum profit: Limited
  • Maximum loss: Limited
  • Strategy: Volatility strategy

Opening the position

Short Call Condor Option Positions

Short Call Condor Option Positions

  • Sell a lower strike (ITM) Call option.
  • Buy a middle lower strike (ITM) Call option.
  • Buy a middle higher strike (OTM) Call option.
  • Sell a higher strike (OTM) Call option.
  • All components must have the same expiration and only Call options are used. The difference between consecutive strike prices must be equal.

Steps

Entry:

  • Look for shares showing pennant or similar shapes on charts.

Exit:

  • The position can be closed only before expiration.

Basic characteristics

Maximum loss: Difference between consecutive strike prices - Net credit.

Maximum profit: Net Credit.

Time decay: Time usually has a negative effect on the value. However, when the position is making profit, time can have a positive effect as well.

Lower breakeven point: Lower strike price + Net Credit.

Upper breakeven point: Higher strike price - Net credit.

Advantages and disadvantages

Advantages:

  • The investor can profit from share prices moving within given limits.
  • Limited loss.

Disadvantages:

  • Profit can be increased only if the strike prices are farther from each other.
  • Potentially higher profit is only possible close to expiration.
  • The potential loss is much larger than the potential profit.

Closing the position

Closing the position:

  • Buy back the Short Puts and sell the Long Puts.

Mitigation of losses:

  • Close the position the above-mentioned way.

Example

Short Call Condor strategy example

Short Call Condor strategy example

ABCD is traded for $52.87 on 17. 05. 2017. The investor sells a Short Call option which has a strike price of $45.00, expires in August 2017. and costs $10.16 (premium). Then he buys a Long Call option which has a strike price of $50.00, expires in August 2017. and costs $7.05 (premium). Then buys another Long Call option which has a strike price of $55.00, expires in August 2017. and costs $4.70 (premium). Finally, he sells another Short Call option which has a strike price of $60.00, expires in August 2017. and costs $3.02 (premium).

Price of the underlying (share price): S= $52.87
Premium (Short Call 1): SC1= $10.16
Premium (Long Call 1): LC1= $7.05
Premium (Long Call 2): LC2= $4.70
Premium (Short Call 2): SC2= $3.02
Strike price (Short Call 1): KS1= $45.00
Strike price (Long Call 1): KL1= $50.00
Strike price (Long Call 2): KL2= $55.00
Strike price (Short Call 2): KS2= $60.00
Net credit: NCr
Maximum loss: R
Maximum profit: Pr
Lower breakeven point: LBEP
Upper breakeven point: UBEP

Net credit: NCr = (SC1 + SC2) - (LC1 + LC2)
Maximum loss (risk): R = (KS2 - KL2) - NCr or R = (KL2 - KL1) - NCr or R = (KL1 - KS1) - NCr
Maximum profit: Pr = NCr
Lower breakeven point: LBEP = KS1 + NCr
Upper breakeven point: UBEP = KL2 – NCr

NCr = $1.43
R = $3.57
Pr = $1.43
LBEP = $46.43
UBEP = $58.57