A condor takes the body of a butterfly spread [two options at the middle strike] and splits the short options between two middle strikes. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three. You can also view a condor as a combination of a bull and bear call spread. The long condor can be a great strategy to use when your outlook on a stock or index is neutral and the price is expected to trade in a fairly well-defined range.
Using call options with the expiration date, a condor option spread is constructed by selling a lower strike in-the-money call, buying an even lower striking in-the-money call, selling a higher strike out-of-the-money call, and buying another even higher strike out-of-the-money call. The trade has a total of four legs and is entered as a net debit.
Here is the profit and loss graph for a condor at expiration:
Maximum profit for the long condor option strategy occurs when the stock price falls between the two middle strikes at expiration.
Calculating maximum profit:
- Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Lower Strike Long Call – Net Debit Paid – Commissions
- Max profit occurs when the price of the underlying is in between the strike prices of the two short options
The maximum possible loss for a long condor option strategy is equal to the initial debit paid to enter the trade. This occurs when the underlying stock price at expiration is at or below the lowest strike long option or when the stock price is at or above the highest strike long option.
The formula for calculating maximum loss is given below:
- Max Loss = Net Debit Paid + Commissions
- Max loss occurs when price of the underlying <= the strike of the lower strike long option OR the price of the underlying >= the strike of the higher strike long option
Like the butterfly spread, the condor has break-even points, one on the low side and one on the high side.
Calculating the breakeven points:
- Upper Breakeven Point = Strike Price of Highest Strike Long Option – Total Premium Collected on the Short Options
- Lower Breakeven Point = Strike Price of Lowest Strike Long Option +Total Premium Collected on the Short Options