Short Call Condor
Strategy motivation
You may consider a short call condor if you expect a security's price to break a certain range and want to limit the risk.
Construction of the strategy
A short call condor strategy involves trading four options of the same underlying asset.
● Sell a call1
● Buy a call2
● Buy a call3
● Sell 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 short call condor strategy consists of selling an ITM call with the lowest strike, buying an ITM call with the second lowest strike, buying an OTM call with the second highest strike, and selling an OTM call with the highest strike.
The distance between the ITM calls equals the OTM calls. All calls have the same expiration date.
In theory, this strategy has both limited potential profit and risk.
You can get the maximum profit if the asset's price is above the highest strike price or below the lowest strike price at expiration. And the maximum potential loss would occur should the asset's price range between the two middle strike prices at expiration.
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. However, the risk of a short call condor exceeds the potential reward, so we do not recommend non-professional investors use this strategy.
Gain & Loss
● Breakeven
Upside Breakeven = Highest Strike - Net Premium received.
Downside Breakeven = Lowest Strike+ Net Premium received.
● Max gain
Net premium received
● Max loss
Max Loss= Highest Strike - Second Highest Strike - Net Premium received
Example
Suppose a stock called TUTU on Nasdaq is currently trading at $52. You expect its price to fall below $48 or rise above $56. So you decide to use a short call condor:
● Sell a $6 TUTU call with a strike of $48
● Buy a $4 TUTU call with a strike of $50
● Buy a $2 TUTU call with a strike of $54
● Sell 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
