Long Call Condor
You may consider a long call condor when you expect a security's price to move in a certain range and want to limit your risks.
Construction of the strategy
A long call condor strategy involves trading four options of the same underlying asset.
● Buy a call1
● Sell a call2
● Sell a call3
● Buy a call4
Call1, call2, call3, and call4 have the same expiration but different strike prices.
Strike price: call1<call2<call3<call4, call2-call1=call4-call3
Brief description
In general, a long call condor strategy consists of buying an ITM call with the lowest strike, selling an ITM call with the second lowest strike, selling an OTM call with the second highest strike and buying an OTM call with the highest strike.
The distance between the ITM calls equals that of the OTM calls. Also, all calls have the same expiration date.
In theory, this strategy has both limited potential profit and risk.
You can get the maximum potential profit if the asset's price range is between the two middle strike prices at expiration. And the maximum potential loss would occur should the asset's price move below the lowest strike or above the highest strike prices at expiration.
A wider distance between these two strikes increases the probability of getting the maximum profit, but it lowers the potential max gain at the same time.
Compared to a long call butterfly, a long call condor has a wider profit zone, but its potential maximum profit is lower, and the maximum loss is higher.
When using this strategy, you should pay attention to the cost (including commissions) because it includes at least four option trades. It is important to ensure a favorable risk/reward ratio.
Gain & Loss
● Breakeven
Upside Breakeven = Highest Strike - Net Premium Paid.
Downside Breakeven = Lowest Strike + Net Premium Paid.
● Max gain
Max Gain = Highest Strike – Second Highest Strike - Net Premium Paid
● Max loss
Net premium paid
Example
Suppose a stock called TUTU on Nasdaq is currently trading at $52. You expect its price will move between $50 and $54. So you decide to implement a long call condor:
● Buy a $6 TUTU call with a strike of $48
● Sell a $4 TUTU call with a strike of $50
● Sell a $2 TUTU call with a strike of $54
● Buy a $1 TUTU call with a strike of $56
(The following calculations do not include transaction costs.）
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
