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)
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Buy Lower
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Sell middle
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Sell middle
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Buy higher
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Long Call
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Strike Call
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strike call
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strike call
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strike call
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Condor
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