Please note: Commission, dividends, margins, taxes and other transaction charges have not been included in the following examples. However, these costs can have a significant effect on expected returns and should be considered. Because of the importance of tax considerations to all options transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions.
XYZ is trading at $45 in September. An options trader wants to implement a limited risk, non-directional trading strategy on XYZ which is viewed as being a low volatility type stock. This trader enters a Condor spread by choosing the following options:
Buy one October 35 Call at $11.00
Sell one October 40 Call at $7.00
Sell one October 50 Call at $2.00
Buy one October 55 Call at $1.00
Net debit equals $3.00
Consider the three possible scenarios at expiration:
Stock at $35 or Lower
All options will expire worthless and there will be a maximum loss of $3.00 ($300) which was the cost of the Condor spread.
Stock at $55 or Higher
The long October 55 call expires worthless but the long October 35 call is now worth $20. The short October 40 call is now worth $15 and the short October 50 call is worth $5. The long call profit and the short call losses off-set each other so we still have a loss of $3 ($300) which was the original net debit we paid to initiate the trade.
Stock Between $40 and $50
The long October 35 call is now in-the-money. The short October 40 call is also in-the-money. The October 50 and 55 calls expire worthless. We paid $3 to initiate the trade so our maximum profit was achieved at $2 ($200).
For those who are neutral on a particular stock over the near-term, and who require a known, limited risk and reward, the Long Condor Spread might be an appropriate strategy to use. Purchasing a Long Condor Spread one time can usually require a small initial cash investment to achieve a profit if your neutral forecast proves correct.