The condor option strategy is a limited risk, non-directional option trading strategy. It has been structured so as to earn a limited profit when the underlying security is perceived to have little volatility. The trader can implement a long condor option spread by writing a lower strike in-the-money call, buying an even lower striking in-the-money call, writing a higher strike out-of-the-money call and buying another even higher striking out-of-the-money call. This can be done using call options expiring on the same month. A total of 4 legs are involved in the condor options strategy and a net debit is required to establish the position.
Limited Profit
When the stock price falls between the 2 middle strikes at expiration maximum profit for the long condor option strategy is achieved. It can be derived that the maximum profit is equal to the difference in strike prices of the 2 lower striking calls less the initial debit taken to enter the trade.
The formula for calculating maximum profit is given below:
- Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Lower Strike Long Call – Net Premium Paid – Commissions Paid
- Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls
Limited Risk
The maximum possible loss for a long condor option strategy is equal to the initial debit taken when entering the trade. It happens when the underlying stock price on expiration date is at or below the lowest strike price and also occurs when the stock price is at or above the highest strike price of all the options involved.
The formula for calculating maximum loss is given below:
- Max Loss = Net Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call
