The Condor
Risk: low
Reward: low
General Description
The condor is a butterfly stretched over 4 strike prices instead of 3. Entering a condor entails selling calls at two consecutive strike prices (this forms the “body”) and then buying a call above and below the body. The condor is a combination of a bull call spread and a bear call spread.
The Thinking
You are not bullish or bearish and you feel fairly certain the stock will not move much from its current position. As with the butterfly, this strategy is not recommended by those who trade small position sizes because commissions will kill you. This strategy is best used by those looking to make small amount of money multiplied by a large position size.
Example
Let's say IBM is trading @ 75, and you sell the 75 and 80 calls for 2.5 and 1.0, and you buy the 70 and 85 calls for 6.0 and 0.50 for net debit of 3.0.
If the stock closes at 75, the 75, 80 and 85 calls expire worthless and the 70 calls would be worth 5.0.The 5-point gain vs. the 3-point debit to initiate the trade gives you a profit of 2.0.
If the stock closes at 80, the 80 and 85 calls would expire worthless, and the 5 point loss in the short 75 call position would be canceled out with the 10 point gain of the 70 calls, so your net is still 5.0 and your profit is still 2.0. This is your max gain. It occurs anywhere between 75 and 80.
Your profit declines above 80 and below 75 with the max loss occurring above 85 and below 70, but your max loss is locked in as the initial cost of the trade.
The image below summarizes the trade with a P/L Diagram.
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