Options - Condors

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A Condor is an options trading strategy that involves trading four options at different strike prices. A condor is a neutral options strategy because it limits gains and losses in both market directions. The name of this strategy comes from the shape of its profit/loss graph, which resembles (slightly) a large bird. Traders often refer to the inner two options as the "body" of the condor and the outer two options as the "wings".

A Condor spread is created using the same type of options (calls or puts) for all four strike prices. An Iron Condor spread is created using both puts and calls. The Iron Condor is the more common of the two strategies as, for the same payoff, it can be created as a credit spread thus not requiring a trader to expend capital to execute the trade.

Long Condor

A Long Condor is constructed by combining a Bull Put Spread and a Bear Call Spread. Stated another way, a Long Condor consists of a short Strangle with a long Strangle placed a bit wider to limit potential loss (and, more importantly to options traders, limit margin requirements). In constructing a condor position a trader would buy (long) options on the outer strike prices (the wings). These two options will be an out-of-the-money put at the higher strike price and an out-of-the-money call at the lower strike price. They will then sell options at the inner strike prices, (the body) again using one call and one put option with the put at the higher of the two inner strike prices. If the put and call options of the body are sold at the same strike price, the trade is considered an Iron Butterfly, because the payoff graph resembles that of a Butterfly spread.

Payoff

A trader who uses a long condor is speculating that the price of the underlying asset at expiration will be between the inner two strike prices where the strategy pays out the most. As such, this strategy is said to be neutral because it is not a bet on a specific directional move in the market. Below is a payoff chart for a long condor position.

Short Condor

A Short Condor is constructed similarly to a long condor, but rather than buying the options on the wings and selling those on the body, a trader would go long on the inner options and short on the outer.


Payoff

In this strategy the trader is betting that the price of the underlying asset at expiration will be either greater than the highest strike price or lower than the lowest strike price. These price ranges are the areas where this strategy provides maximum profits, as seen in the chart below.

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