Short Call Condor Options Trading Strategy

Nilesh Jain

17 Apr 2017

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.

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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).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

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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Short Call Condor Options Trading Strategy

Nilesh Jain

17 Apr 2017

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.

Have Referral Code?