Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

The Condor Spread

 

Example:                 XYZ stock is trading at $45 in September 

Outlook:                  You are neutral on XYZ stock for the short term.

Possible strategy:    Construct the Condor Spread to take advantage of short term time decay.                                

                                  Buy one Oct 35 strike call at $11.00

                                  Sell one Oct 40 strike call at   $7.00

                                  Sell one Oct 50 strike call at   $2.00

                                  Buy one Oct 55 strike call at   $1.00                                                              

                                                               Net Debit    $3.00 ($300)

 *All values shown are at the time of expiration. Commissions and other trading fees not included.

At Expiration:

  • Maximum Profit = Lower middle - ITM strike - Net Debit
  • Maximum Profit = 40 - 35 - $3.00 = $2.00
  • Maximum Loss = Net Debit ($3.00)
  • Breakevens = Higher strike Call - Net Debit

                                         55 - 3 = 52

                                    Lower strike Call + Net Debit

                                         35 + 3 = 38

 
 

In Summary: The Condor Spread with calls is actually the combination of a Bull Call Spread and Bear Call Spread.  It is a limited risk and limited profit strategy.  It is most profitable if XYZ stock stabilizes anywhere between the two middle short strike calls.        

  VIX Snapshot

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