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 May 

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

Possible Strategy:   Trade the Condor Spread to try and take advantage of short term time decay.

                                  Buy one June 35 strike call at $11.00

                                  Sell one June 40 strike call at   $7.00

                                  Sell one June 50 strike call at   $2.00

                                  Buy one June 55 strike call at   $1.00                                                              

                                                                 Net Debit    $3.00 ($300)

At Expiration:

  • Maximum Profit = Lower Middle Strike - In the Money Strike - Net Debit
  • Maximum Profit = 40 - 35 - $3.00 = $2.00
  • Maximum Loss = Net Debit ($3.00)
  • Breakevens = Higher Strike - Net Debit

                                         55 - 3 = 52

                                    Lower Strike + 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. Some investors prefer to trade Condor's using index options which may not be quite as volatile as individual stocks.      

  VIX Snapshot

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