Long Call Condor Options Trading Strategy

Nilesh Jain

17 Apr 2017

New Page 1

Long Call Condor options trading strategy

A Long Call Condor is similar to a Long Butterfly strategy, wherein the only exception is that the difference of two middle strikes sold has separate strikes. The maximum profit from condor strategy may be low as compared to other trading strategies; however, a condor strategy has high probability of making money because of wider profit range.

When to initiate a Long Call Condor

A Long Call Condor spread should be initiated when you expect the underlying assets to trade in a narrow range as this strategy benefits from time decay factor.

How to construct a Long Call Condor?

A Long Call Condor can be created by buying 1 lower ITM call, selling 1 lower middle ITM call, selling 1 higher middle OTM call and buying 1 higher OTM calls of the same underlying security with the same expiry. The ITM and OTM call strikes should be equidistant.

Strategy

Buy 1 ITM Call, Sell 1 ITM Call, Sell 1 OTM Call and Buy 1 OTM Call

Market Outlook

Neutral on market direction and Bearish on volatility

Motive

Anticipating minimal price movement in the underlying assets

Upper Breakeven

Higher Strike price - Net Premium Paid

Lower Breakeven

Lower Strike price + Net Premium Paid

Risk

Limited to Net premium paid

Reward

Limited (Maximum profit is achieved when underlying expires between sold strikes)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price

9100

Buy 1 deep ITM call of strike price (Rs)

8900

Premium paid (Rs)

240

Sell 1 ITM call of strike price (Rs)

9000

Premium received (Rs)

150

Sell 1 OTM call of strike price (Rs)

9200

Premium received (Rs)

40

Buy 1 deep OTM call of strike price (Rs)

9300

Premium paid (Rs)

10

Upper breakeven

9240

Lower breakeven

8960

Lot size

75

Net premium paid

60

Suppose Nifty is trading at 9100. An investor Mr. A estimates that Nifty will not rise or fall much by expiration, so he enters a Long Call Condor and buys 8900 call strike price at Rs 240, sells 9000 strike price of Rs 150, sells 9200 strike price for Rs 40 and buys 9300 call for Rs 10. The net premium paid to initiate this trade is Rs 60, which is also the maximum possible loss. This strategy is initiated with a neutral view on Nifty hence it will give the maximum profit only when there is little or no movement in the underlying security. Maximum profit from the above example would be Rs 3000 (40*75). The maximum profit would only occur when underlying assets expires in the range of strikes sold.

In the mentioned scenario, maximum loss would be limited up to Rs 4500 (60*75) and it will occur if the underlying assets goes below 8960 or above 9240 strikes at expiration. If the underlying assets expires at the lowest strike then all the options will expire worthless, and the debit paid to initiate the position would be lost. If the underlying assets expire at highest strike, all the options below the highest strike would be In-the-Money. Furthermore, the resulting profit and loss would offset and net premium paid would be lost.

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 bought (Rs) 8900

Net Payoff from 1 ITM Call sold (Rs) 9000

Net Payoff from 1

OTM Call sold (Rs)

9200

Net Payoff from 1 deep OTM call bought (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 Long Call Condor spread remains close to zero.

Vega: Long Call Condor has a negative Vega. Therefore, one should initiate Long Call Condor spread when the volatility is high and expect to decline.

Theta: A Long Call Condor has a net positive Theta, which means strategy will benefit from the erosion of time value.

Gamma: The Gamma of a Long Call Condor strategy goes to lowest values if it stays between sold strikes, and goes higher if it moves away from middle strikes.

Analysis of Long Call Condor spread strategy

A Long Call Condor spread is best to use when you are confident that an underlying security will not move significantly and stays in a range of strikes sold. Long Call Condor has a wider sweet spot than the Long Call Butterfly. But there is a tradeoff; this is a limited reward to risk ratio strategy for advance traders.

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Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

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Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

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Long Call Condor Options Trading Strategy

Nilesh Jain

17 Apr 2017

New Page 1

Long Call Condor options trading strategy

A Long Call Condor is similar to a Long Butterfly strategy, wherein the only exception is that the difference of two middle strikes sold has separate strikes. The maximum profit from condor strategy may be low as compared to other trading strategies; however, a condor strategy has high probability of making money because of wider profit range.

When to initiate a Long Call Condor

A Long Call Condor spread should be initiated when you expect the underlying assets to trade in a narrow range as this strategy benefits from time decay factor.

How to construct a Long Call Condor?

A Long Call Condor can be created by buying 1 lower ITM call, selling 1 lower middle ITM call, selling 1 higher middle OTM call and buying 1 higher OTM calls of the same underlying security with the same expiry. The ITM and OTM call strikes should be equidistant.

Strategy

Buy 1 ITM Call, Sell 1 ITM Call, Sell 1 OTM Call and Buy 1 OTM Call

Market Outlook

Neutral on market direction and Bearish on volatility

Motive

Anticipating minimal price movement in the underlying assets

Upper Breakeven

Higher Strike price - Net Premium Paid

Lower Breakeven

Lower Strike price + Net Premium Paid

Risk

Limited to Net premium paid

Reward

Limited (Maximum profit is achieved when underlying expires between sold strikes)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price

9100

Buy 1 deep ITM call of strike price (Rs)

8900

Premium paid (Rs)

240

Sell 1 ITM call of strike price (Rs)

9000

Premium received (Rs)

150

Sell 1 OTM call of strike price (Rs)

9200

Premium received (Rs)

40

Buy 1 deep OTM call of strike price (Rs)

9300

Premium paid (Rs)

10

Upper breakeven

9240

Lower breakeven

8960

Lot size

75

Net premium paid

60

Suppose Nifty is trading at 9100. An investor Mr. A estimates that Nifty will not rise or fall much by expiration, so he enters a Long Call Condor and buys 8900 call strike price at Rs 240, sells 9000 strike price of Rs 150, sells 9200 strike price for Rs 40 and buys 9300 call for Rs 10. The net premium paid to initiate this trade is Rs 60, which is also the maximum possible loss. This strategy is initiated with a neutral view on Nifty hence it will give the maximum profit only when there is little or no movement in the underlying security. Maximum profit from the above example would be Rs 3000 (40*75). The maximum profit would only occur when underlying assets expires in the range of strikes sold.

In the mentioned scenario, maximum loss would be limited up to Rs 4500 (60*75) and it will occur if the underlying assets goes below 8960 or above 9240 strikes at expiration. If the underlying assets expires at the lowest strike then all the options will expire worthless, and the debit paid to initiate the position would be lost. If the underlying assets expire at highest strike, all the options below the highest strike would be In-the-Money. Furthermore, the resulting profit and loss would offset and net premium paid would be lost.

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 bought (Rs) 8900

Net Payoff from 1 ITM Call sold (Rs) 9000

Net Payoff from 1

OTM Call sold (Rs)

9200

Net Payoff from 1 deep OTM call bought (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 Long Call Condor spread remains close to zero.

Vega: Long Call Condor has a negative Vega. Therefore, one should initiate Long Call Condor spread when the volatility is high and expect to decline.

Theta: A Long Call Condor has a net positive Theta, which means strategy will benefit from the erosion of time value.

Gamma: The Gamma of a Long Call Condor strategy goes to lowest values if it stays between sold strikes, and goes higher if it moves away from middle strikes.

Analysis of Long Call Condor spread strategy

A Long Call Condor spread is best to use when you are confident that an underlying security will not move significantly and stays in a range of strikes sold. Long Call Condor has a wider sweet spot than the Long Call Butterfly. But there is a tradeoff; this is a limited reward to risk ratio strategy for advance traders.

Have Referral Code?