Equity Option Strategies - Iron Condor

The Equity Strategy Workshop is a collection of discussion pieces followed by interactive worksheets. The workshop is designed to assist individuals in learning how options work and in understanding various options strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice.

Investment decisions should not be made based upon worksheet outcomes.

Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet.

Who Should Consider a Long Call Condor Spread?

  • An investor who is anticipating minimal movement on a stock within a certain period of time.

A Long Condor Spread with calls is the combination of two other popular option strategies. It is a long call spread and short call spread. The Condor is a neutral strategy which allows an investor the opportunity to profit from a somewhat narrow range in the underlying stock during a specific period of time.

Definition

Buying equity calls as part of this strategy gives the buyer the right, but not the obligation, to buy shares of underlying stock at a specified price (the strike price) at any time before a specific time (the expiration date). Selling equity calls gives the seller the obligation to sell shares of underlying stock at a specified price (the strike price) at any time before a specific time (the expiration date) if assigned an exercise notice before the expiration date. Now that you are aware of the rights and obligations of call sellers and buyers, you should also know that this neutral strategy is covered with the purchase and sale of the same amount of calls.

The profit potential for a Long Condor Spread is limited to the difference in the strike prices of the long call spread less the net debit paid for the spread. The maximum profit is achieved when the stock is in between the strike prices of the two short calls. The financial risk is limited to the net debit paid to establish the spread. The break-even points are the lower strike plus the net debit paid and the highest strike less the net debit paid.

After the Condor is established, an increase in implied volatility will have a greater short term negative financial impact on the options you sold than the positive financial impact on the options you bought. A decrease in implied volatility will have a more favorable financial effect on the short calls than the negative financial impact on the calls you bought. Volatility up, call premiums up. Volatility down, call premiums down. Also it is very important to keep in mind, an increase in implied volatility may imply more movement either up or down in the stock price, which you don’t want with a neutral strategy.

Time decay will be favorable to this spread, because the near the money calls you sold will have more time premium than the options you bought.

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