Short Call Condor Options Trading Strategy
17 Apr 2017
Nilesh Jain
New Page 1
A Short Call Condor is similar to Short Butterfly strategy. The only
exception is that the difference of two middle strikes bought has different strikes.
When to initiate a Short call condor?
A Short Call Condor is implemented when the investor is expecting
movement outside the range of the highest and lowest strike price of the underlying
assets. Advance traders can also implement this strategy when the implied volatility of
the underlying assets is low and you expect volatility to go up.
How to construct a Short Call Condor?
A Short Call Condor can be created by selling 1 lower ITM call, buying
1 lower middle ITM call, buying 1 higher middle OTM call and selling 1 higher OTM calls of
the same underlying security with the same expiry. The ITM and OTM call strikes should be
equidistant.
Strategy
|
Sell 1 ITM Call, Buy 1 ITM Call, Buy 1 OTM Call and
Sell 1 OTM Call
|
Market Outlook
|
Significant volatility above higher and lower strikes
|
Motive
|
Anticipating price movement in the underlying assets
|
Upper Breakeven
|
Highest strike price - Net credit
|
Lower Breakeven
|
Lowest strike price + Net credit
|
Risk
|
Limited (if expires above lower breakeven point and
vice versa)
|
Reward
|
Limited to Net premium received
|
Margin required
|
Yes
|
Let’s try to understand with an example:
Nifty Current spot price
|
9100
|
Sell 1 ITM call of strike price (Rs)
|
8900
|
Premium received (Rs)
|
240
|
Buy 1 ITM call of strike price (Rs)
|
9000
|
Premium paid (Rs)
|
150
|
Buy 1 OTM call of strike price (Rs)
|
9200
|
Premium paid (Rs)
|
40
|
Sell 1 OTM call of strike price (Rs)
|
9300
|
Premium received (Rs)
|
10
|
Upper breakeven
|
9240
|
Lower breakeven
|
8960
|
Lot Size
|
75
|
Net premium received
|
60
|
Suppose Nifty is trading at 9100. An investor Mr. A estimates that
Nifty will move significantly by expiration, so he enters a Short Call
Condor and sells 8900 call strike price at Rs 240, buys 9000 strike price of Rs
150, buys 9200 strike price for Rs 40 and sells 9300 call for Rs 10. The net premium received to initiate this trade is Rs 60, which is also the maximum
possible reward. This strategy is initiated with a view of significant volatility on Nifty
hence it will give the maximum profit only when there is movement in the underlying
security below 8900 or above 9200. Maximum profit from the above example would be Rs 4500
(60*75). The maximum profit would only occur when underlying assets expires outside the
range of upper and lower breakevens. Maximum loss would also be limited to Rs 3000
(40*75), if it stays in the range of higher and lower breakeven.
For the ease of understanding of the payoff schedule, we did not take
in to account commission charges. Following is the payoff schedule assuming different
scenarios of expiry.
The Payoff Schedule:
On Expiry NIFTY closes at
|
Net Payoff from 1 Deep ITM Call Sold
(Rs) 8900
|
Net Payoff from 1 ITM Calls Bought (Rs)
9000
|
Net Payoff from 1
OTM Call bought (Rs) 9200
|
Net Payoff from 1 deep OTM Call sold
(Rs.) 9300
|
Net Payoff (Rs)
|
8600
|
240
|
-150
|
-40
|
10
|
60
|
8700
|
240
|
-150
|
-40
|
10
|
60
|
8800
|
240
|
-150
|
-40
|
10
|
60
|
8900
|
240
|
-150
|
-40
|
10
|
60
|
8960
|
180
|
-150
|
-40
|
10
|
0
|
9000
|
140
|
-150
|
-40
|
10
|
-40
|
9100
|
40
|
-50
|
-40
|
10
|
-40
|
9200
|
-60
|
-50
|
-40
|
10
|
-40
|
9240
|
-100
|
90
|
0
|
10
|
0
|
9300
|
-160
|
150
|
60
|
10
|
60
|
9400
|
-260
|
250
|
160
|
-90
|
60
|
9500
|
-360
|
350
|
260
|
-190
|
60
|
9600
|
-460
|
450
|
360
|
-290
|
60
|
The Payoff Graph:
Impact of Options Greeks before expiry:
Delta: If the underlying asset remains between the lowest and
highest strike price the net Delta of a Short Call Condor spread remains close to zero.
Vega: Short Call Condor has a positive Vega. Therefore, one should
buy Short Call Condor spread when the volatility is low and expect to rise.
Theta: Theta will have a negative impact on the strategy, because
option premium will erode as the expiration dates draws nearer.
Gamma: The Gamma of a Short Call Condor strategy goes to
lowest if it moves above the highest or below the lowest strike.
Analysis of Short Call Condor spread strategy
A Short Call Condor spread is best to use when you are
confident that an underlying security will move outside the range of
lowest and highest strikes. Unlike straddle and strangles strategies risk involved in
short call condor is limited.