LONG CALL CONDOR: BUY 1 ITM CALL OPTION (LOWER STRIKE), SELL 1 ITM CALL OPTION (LOWER MIDDLE), SELL 1 OTM CALL OPTION (HIGHER MIDDLE), BUY 1 OTM CALL OPTION (HIGHER STRIKE)

Example :


Suppose Nifty is at 3600 in June. An investor enters a condor trade by buying a Rs. 3400

strike price call at a premium of Rs. 41.25, sells a Rs. 3500 strike price call at a premium of

Rs. 26. sells another call at a strike price of Rs. 3700 at a premium of Rs. 9.80 and buys a

call at a strike price of Rs. 3800 at a premium of Rs. 6. The net debit from the trades is Rs.

11.45. This is also his maximum loss.


To further see why Rs. 11.45 is his maximum possible loss, lets examine what happens when Nifty falls to 3200 or rises to 3800 on expiration.

At 3200, all the options expire worthless, so the initial debit taken of Rs. 11.45 is the investors maximum loss.

At 3800, the long Rs. 3400 call earns Rs. 358.75 (Rs. 3800 – Rs. 3400 – Rs. 41.25). The two calls sold result in a loss of Rs. 364.20 (The call with strike price of Rs. 3500 makes a loss of Rs. 274 and the call with strike price of Rs. 3700 makes a loss of Rs. 90.20). Finally, the call purchased with a strike price of Rs. 3800 expires worthless resulting in a loss of Rs. 6 (the premium). Total loss (Rs. 358.75 – Rs. 364.20 – Rs. 6) works out to Rs. 11.45. Thus, the long condor trader still suffers the maximum loss that is equal to the initial debit taken when entering the trade.

If instead on expiration of the contracts, Nifty is still at 3600, the Rs. 3400 strike price call purchased and Rs. 3700 strike price call sold earns money while the Rs. 3500 strike price call sold and Rs. 3800 strike price call sold end in losses.

The Rs. 3400 strike price call purchased earns Rs. 158.75 (Rs. 200 – Rs. 41.25). The Rs. 3700 strike price call sold earns the premium of Rs. 9.80 since it expires worthless and does not get exercised. The Rs. 3500 strike price call sold ends up with a loss of Rs. 74 as the call gets exercised and the Rs. 3800 strike price call purchased will expire worthless resulting in a loss of Rs. 6.00 (the premium). The total gain comes to Rs. 88.55 which is also the maximum gain the investor can make with this strategy.

The maximum profit for the condor trade may be low in relation to other trading strategies but it has a comparatively wider profit zone. In this example, maximum profit is achieved if the underlying stock price at expiration is anywhere between Rs. 3500 and Rs. 3700.





The payoff chart (Long Call Condor)





+

+


=













Buy Lower
Sell middle
Sell middle
Buy higher

Long Call
Strike Call
strike call
strike call
strike call

Condor