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)
A Long Call Condor is very similar to a long
butterfly strategy. The difference is that the two middle sold options have
different strikes. The profitable area of the pay off profile is wider than
that of the Long Butterfly (see pay-off diagram).
The strategy is suitable in a range bound market.
The Long Call Condor involves buying 1 ITM Call (lower strike), selling 1 ITM
Call (lower middle), selling 1 OTM call (higher middle) and buying 1 OTM
Call (higher strike). The long options at the outside strikes ensure that the
risk is capped on both the sides. The resulting position is profitable if the
stock / index remains range bound and shows very little volatility. The maximum
profits occur if the stock finishes between the middle strike prices at expiration.
Let us understand this with an example.
When to Use: When an investor believes that the
underlying market will trade in a range with low volatility until the options
expire.
Risk Limited to the minimum of the difference
between the lower strike call spread less the higher call spread less the total
premium paid for the condor.
Reward Limited. The maximum profit of a long
condor will be realized when the stock is trading between the two middle strike
prices.
Break Even Point:
Upper
Breakeven Point =
Highest Strike – Net Debit
Lower Breakeven Point =
Lowest Strike + Net Debit
Example: Nifty is at 3600. Mr. XYZ expects little volatility in the Nifty and
expects the market to remain rangebound. Mr. XYZ buys 1 ITM Nifty Call Options
with a strike price of Rs. 3400 at a premium of Rs. 41.25, sells 1 ITM Nifty
Call Option with a strike price of Rs. 3500 at a premium of Rs. 26, sells 1 OTM
Nifty Call Option with a strike price of Rs. 3700 at a premium of Rs. 9.80 and
buys 1 OTM Nifty Call Option with a strike price of Rs. 3800 at a premium of
Rs. 6.00. The Net debit is Rs. 11.45 which is also the maximum possible loss.
STRATEGY
: 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)
|
Nifty index
|
Current Value
|
3600
|
|
|
|
|
|
Buy 1 ITM Call Option
|
Strike Price (Rs.)
|
3400
|
|
|
|
|
|
Mr. XYZ pays
|
Premium (Rs.)
|
41.25
|
|
|
|
|
|
Sell 1 ITM Call Option
|
Strike Price (Rs.)
|
3500
|
|
|
|
|
|
Mr. XYZ receives
|
Premium (Rs.)
|
26.00
|
|
|
|
|
|
Sell 1 OTM Call Option
|
Strike Price (Rs.)
|
3700
|
|
|
|
|
|
Mr. XYZ receives
|
Premium (Rs.)
|
9.80
|
|
|
|
|
|
Buy 1 OTM Call Option
|
Strike Price (Rs.)
|
3800
|
|
|
|
|
|
Mr. XYZ pays
|
Premium (Rs.)
|
6.00
|
|
|
|
|
|
|
Break Even Point
|
3788.55
|
|
|
(Upper) (Rs.)
|
|
|
|
|
|
|
|
Break Even Point
|
3411.45
|
|
|
(Lower)
(Rs.)
|
|
The
Payoff Schedule|
On expiry
|
Net Payoff
|
Net Payoff
|
Net Payoff
|
Net Payoff
|
Net Payoff
|
|
Nifty
|
from 1ITM
|
from 1
|
from 1
|
from 1 OTM
|
(Rs.)
|
|
Closes at
|
Call
|
ITM Call
|
OTM Call
|
Call
|
|
|
|
purchased
|
sold (Rs.)
|
sold (Rs.)
|
purchased
|
|
|
|
(Rs.)
|
|
|
(Rs.)
|
|
|
3000.00
|
-41.25
|
26
|
9.80
|
-6
|
-11.45
|
|
3100.00
|
-41.25
|
26
|
9.80
|
-6
|
-11.45
|
|
3200.00
|
-41.25
|
26
|
9.80
|
-6
|
-11.45
|
|
3300.00
|
-41.25
|
26
|
9.80
|
-6
|
-11.45
|
|
3400.00
|
-41.25
|
26
|
9.80
|
-6
|
-11.45
|
|
3411.45
|
-29.80
|
26
|
9.80
|
-6
|
0.00
|
|
3500.00
|
58.75
|
26
|
9.80
|
-6
|
88.55
|
|
3600.00
|
158.75
|
-74
|
9.80
|
-6
|
88.55
|
|
3700.00
|
258.75
|
-174
|
9.80
|
-6
|
88.55
|
|
3788.55
|
347.30
|
-263
|
-78.8
|
-6
|
0.00
|
|
3800.00
|
358.75
|
-274
|
-90.2
|
-6
|
-11.45
|
|
3900.00
|
458.75
|
-374
|
-190.2
|
94
|
-11.45
|
|
4000.00
|
558.75
|
-474
|
-290.2
|
194
|
-11.45
|
|
4100.00
|
658.75
|
-574
|
-390.2
|
294
|
-11.45
|
|
4200.00
|
758.75
|
-674
|
-490.2
|
394
|
-11.45
|
