Short Call Condor
Entering a short call condor entails selling (1) lower strike call, buying (1) middle strike call, buying (1) higher middle strike call and selling (1) higher strike call (same expiration month, distance between the two lower legs is equal to the distance between the two upper legs). It's essentially a combination of a lower strike bear call spread and a higher strike bull call spread, and it's similar to a short call butterfly except the long calls are spread out over two strikes.
(draw a short call condor risk diagram here)
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. You employ a lower strike bear call spread, which achieves max profitability when the underlying drops (although profitability is capped) and a higher strike bull call spread, which achieves max profitability when the underlying rallies (although profitability is capped). If you are correct, if the stock moves big (preferably above the upper strike or below the lower strike) you'll profit.
XYZ is at $57.50, and your analysis says a big move is coming (earnings or some other big announcement). You sell (1) 50 call for $8.00 and buy (1) 55 call for $3.50 to complete the bear call spread. Then you buy (1) 60 call for $1.00 and sell (1) 65 call for $0.50 to complete the bull call spread. The net credit is $4.00.
Below the lowest strike, all calls expire worthless, and your profit is the net credit received when the trade was initiated.
Above the highest strike, all calls are in-the-money exactly cancel each other out. Your profit is the net credit collected when the trade was initiated. For example, at $70, the 50 call will be worth $20.00 ($12.00 loss), the 55 call will be worth $15.00 ($11.50 profit), the 60 call will be $10.00 ($9.00 profit) and the 65 call will be worth $5.00 ($4.50 loss). The net of this is $4.00 profit.
Between the middle strikes ($55 and $60) the max loss is suffered. After all that’s where the lower strike bear call spread and the upper strike bull call spread both are at max loss, so it’s a double whammy. As an example, at $57.5, the 50 call will be worth $7.50 ($0.50 profit), the 55 call will be worth $2.50 ($1.00 loss), the 60 call will be worthless ($1.00 loss) and the 65 call will be worthless ($0.50 profit). The net of this is $1.00 loss.
The PL chart below graphically shows where this trade will be profitable and at a loss.