Overview On Neutral- Long Call Condor
The neutral-long call condor is a four-part strategy with three parts consisting of credit spreads, and one part is a long call option. The first trade involves buying one at-the-money put, writing (selling) one out-of-the-money put and buying another at-the-money put for the same underlying security but different expiration month. The next trade sells one at-the-money call and buys another out-of-the-money call with the same expiration month but different underlying security.
The last trade sells another at-the-money call option of shorting an out-of-the-money call for the same underlying security but a different expiration month. The long position in the calls covers the cost of the first three trades, and it makes a profit when the underlying security price moves higher. This strategy is known to be a low volatility strategy. Thus, it will profit from low volatility and lose large when market volatility increases.
What is the Neutral- Long Call Condor?
The Neutral- Long Call Condor is a strategy implemented using four different trades. The neutral-long call condor consists of three credit spreads trades and one long options trade. The credit spreads are a combination of buying and writing (selling) option contracts. The long option protects the trader against unlimited losses because it serves as a barrier to the downside; this allows the trader to stay in the trade and let profits run if the market stays volatile while reducing losses when volatility increases.
The neutral- long call condor is an asymmetrical option spread, with the long options having a higher premium than the short options. To put the whole strategy in perspective, we must first understand what we are trying to achieve by employing it and how.
Illustration of Neutral- Long Call Condor Through an Example:
The neutral-long call condor is implemented using three different trades. The first trade is to buy one at-the-money put, which costs 0.25 and sells the same option for 0.25 but with a different expiration month (a). The second trade is to write one at-the-money put option, which costs 0.15 and sells the same option for 0.15 but with a different expiration month (b). The third trade is to buy another at-the-money put option, which costs 0.10 and is sold by writing a slightly out of the money put option for 0.06 (c). The total cost of the first three trades is 0.45 (d).
The first trade has a maximum profit of 0.60, but the maximum loss is limited to -0.40 (a-c-b). The second trade has a maximum profit of 0.20, but the maximum loss is limited to -0.20 (b+c). The third trade has a maximum profit of 0.75, but the maximum loss is limited to -0.25 (b+c-a). The neutral-long call condor combines three credit spreads to minimise market risk and maximise profitability. In the long options trade, if the market stays low volatile, you will gain profits from 0.20 to 0.20 to 0.75.
If volatility increases, you will lose from -0.25 to -0.40 to -0.60 (d). The neutral-long call condor combines three credit spreads to minimise market risk and maximise profitability. Once again, in this example, if the market stays low volatile, you will gain profits from -0.15 to -0.20 to 0. If volatility increases, you will lose from -0.25 to -0.25 to -0. (d) . If volatility remains high, you will gain profits from -0.25 to 0.20 to 0.75 (d).
The Strategy of Neutral-Long Call Condor:
The neutral-long call condor combines three credit spreads to minimise market risk and maximise profitability. Each of the individual trades that make up the neutral-long call condor is also part of a strategy designed for maximum profit. A credit spread is a type of options trade where you buy an option contract with a lower strike price and sell an option contract with a higher strike price.
In this case, we are looking at buying one at the money selling another out-of-the-money put. This gives us control over the market's direction by protecting ourselves against unlimited loss if the underlying security moves lower and helps us increase profits when volatility increases. To use a simple example, if the price of Apple dropped to $100 on May expiration (OV), the neutral-long call condor would be implemented by buying a call option with a $130 strike price and selling another put option with a $110 strike price.
When the price of Apple dropped to $100, both calls would expire worthlessly, and we will be left with a profit of 0. If the market stayed volatile, we would make 0.20 from the long options and 0.60 from credit spread trades. However, if volatility increased to where volatility increased above 20%, then our profit from long options would be reduced by 20% (to -0 .20), and our profit from the credit spreads would increase by 20% (to 0.60).
Strategy Table:
| On Expiry Bank, NIFTY closes at | Net Payoff from 1 Deep ITM Call bought (Rs ) 8700 | Net Payoff from 1 ITM Call sold (Rs ) 8800 | Net Payoff from 1 OTM Call sold (Rs ) 9000 | Net Payoff from 1 Deep OTM Call bought (Rs ) 9100 | Net Payoff (Rs ) |
|---|---|---|---|---|---|
| 8400 | -14500 | 13000 | 10500 | -9500 | -500 |
| 8600 | -14500 | 13000 | 10500 | -9500 | -500 |
| 8720 | -14000 | 13000 | 10500 | -9500 | 0 |
| 8800 | -12000 | 13000 | 10500 | -9500 | 2000 |
| 9000 | -7000 | 8000 | 10500 | -9500 | 2000 |
| 9080 | -5000 | 6000 | 8500 | -9500 | 0 |
| 9200 | -2000 | 3000 | 5500 | -7000 | -500 |
| 9400 | 3000 | -2000 | 500 | -2000 | -500 |
Detailed Overview of the Steps Taken for the Neutral- Long Call Condor
The neutral-long call condor combines three credit spreads to minimise market risk and maximise profitability. Each trade in the neutral-long call condor is also part of a strategy designed for maximum profit. If you take a step back and look at the trades that make up this option strategy, each has a unique purpose. This means that if you buy credit spread 1, also known as trade B2, you are doing so with the purpose of trading two different options.
Step 1:
You can choose from three different credit spread trades in this first step. You will choose the most appropriate one for your trading strategy from these three credit spread trades. Each credit spread will have its unique pros and cons; it is always important to know what you are getting yourself into when trading options. Different people will have a different risk tolerance and patience with their investment; therefore, one of these credit spreads may appeal to certain individuals more than others. In the case of this specific strategy, it is suggested to choose one of the three trades based on your risk tolerance.
Step 2:
Keep in mind that each credit spread will have its unique pros and cons. Once you have chosen the credit spread that is best suited for your risk tolerance, it is time to determine your expiration month. You will choose your expiration month based on the conditions at that specific time.
Step 3:
In this final step, you need to make sure the option trades expiring by those specific dates have premium values worth purchasing. This is crucial because your time would be wasted if you did not purchase an options contract with premium values worth purchasing.
Advantages of the Neutral- Long Call Condor:
- It enables you to control the direction of the underlying security. One of the biggest advantages of the neutral-long call condor is that it allows you to control the direction of the underlying security, unlike a naked put or short call.
- It can increase your profits from a rise in volatility. One of the biggest advantages of a neutral-long call condor is that it can help you make money from a rise in volatility.
- It allows you to take advantage of the 5% Rule. The 5% rule is an important concept in options trading that people need to understand to make good trading decisions. The 5% rule states that if you only own one option and it is at expiration, your profit will be equal to around 5% of the premium value of your position.
Disadvantages of the Neutral- Long Call Condor:
- It can increase your losses from a fall in volatility.
- You need to be very selective in choosing the right set-ups.
- Buying options spreads always comes with a certain amount of risk. It also requires more work, which means that you will have less time for trading other assets and partake in other leisure activities and lower your overall level of happiness.
- It is very hard to make money from this specific strategy if you do not have enough premium values. This is because you will only be able to maximise profits if the credit spreads expire on the same expiration dates.
Risks of the Neutral- Long Call Condor:
- You need to be able to make it through the following three credit spread trades
- You need to determine which of your three credit spreads should you.
- You will have different premium values for each of the credit spread trades that you choose. If you do not pay attention, the premiums will be lower when compared to theirs.
Wrapping Up:
By staying true to the options strategies part of the neutral-long call condor, you can minimise risk while maximising profits. This is crucial because it would be impossible to make a profit if you did not minimise risk while taking on unlimited profit potential. The neutral-long call condor combines three credit spreads to minimise market risk and maximise profitability.