SHORT CALL
CONDOR : SHORT 1 ITM CALL OPTION (LOWER STRIKE), LONG 1 ITM CALL OPTION (LOWER
MIDDLE), LONG 1 OTM CALL OPTION (HIGHER MIDDLE), SHORT 1 OTM CALL OPTION
(HIGHER STRIKE).
A Short Call Condor is very similar to a short butterfly
strategy. The difference is that the two middle bought options have different
strikes. The strategy is suitable
in a volatile market. The Short Call Condor involves selling 1 ITM Call (lower
strike), buying 1 ITM Call (lower middle), buying 1 OTM call (higher
middle) and selling 1 OTM Call (higher strike). The resulting position is
profitable if the stock / index shows very high volatility and there is a big
move in the stock / index. The maximum profits occur if the stock / index
finishes on either side of the upper or lower strike prices at expiration. Let
us understand this with an example.
When to Use: When an investor believes that the underlying market will break
out of a trading range but is not sure in which direction.
Risk Limited.
The maximum loss of a short condor occurs at the center of the option
spread.
Reward Limited.
The maximum profit of a short condor occurs when the underlying stock /
index is trading past the upper or lower strike prices.
Break Even Point:
Upper Break even Point = Highest Strike – Net Credit
Lower Break Even Point
= Lowest
Strike + Net
Credit
Example: Nifty is at 3600. Mr. XYZ expects high
volatility in the Nifty and expects the market to break open significantly on
any side. Mr. XYZ sells 1 ITM Nifty Call Options with a strike price of Rs.
3400 at a premium of Rs. 41.25, buys 1 ITM Nifty Call Option with a strike
price of Rs. 3500 at a premium of Rs. 26, buys 1 OTM Nifty Call Option with a
strike price of Rs. 3700 at a premium of Rs. 9.80 and sells 1 OTM Nifty Call
Option with a strike price of Rs. 3800 at a premium of Rs. 6.00. The Net credit
is of Rs. 11.45.
STRATEGY : SHORT 1 ITM CALL OPTION (LOWER
STRIKE), LONG 1 ITM CALL OPTION (LOWER MIDDLE), LONG 1 OTM CALL OPTION (HIGHER
MIDDLE), SHORT 1 OTM CALL OPTION (HIGHER STRIKE)
Nifty index
|
Current Value
|
3600
|
Sell 1 ITM Call Option
|
Strike Price (Rs.)
|
3400
|
Premium (Rs.)
|
41.25
|
|
Buy 1 ITM Call Option
|
Strike Price (Rs.)
|
3500
|
Premium (Rs.)
|
26.00
|
|
Buy 1 OTM Call Option
|
Strike Price (Rs.)
|
3700
|
Premium (Rs.)
|
9.80
|
|
Sell 1 OTM Call Option
|
Strike Price (Rs.)
|
3800
|
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 from
|
Net Payoff
|
Net Payoff
|
Net
|
Nifty
|
from 1 ITM
|
1 ITM Call
|
from 1 OTM
|
Payoff
|
|
Closes at
|
Call sold (Rs.)
|
purchased (Rs.)
|
Call purchased
|
Call sold
|
(Rs.)
|
(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
|
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
|
78.75
|
6
|
0
|
3800.00
|
-358.75
|
274
|
90.20
|
6
|
11.45
|
3900.00
|
374
|
190.20
|
-94
|
11.45
|
|
4000.00
|
-558.75
|
474
|
290.20
|
-194
|
11.45
|
4100.00
|
-658.75
|
574
|
390.20
|
-294
|
11.45
|
4200.00
|
-758.75
|
674
|
490.20
|
-394
|
11.45
|
The
payoff chart (Short Call Condor)
+
|
+
|
=
|
|||||||
Sell Lower
|
Buy middle
|
Buy middle
|
Sell higher
|
Short Call
|
|||||
Strike Call
|
strike call
|
strike call
|
strike call
|
Condor
|
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