CONDOR STRATEGY- LONG

CONDOR STRATEGY- LONG: 

CONDOR STRATEGY- LONG The condor option strategy is a limited risk, non-directional option trading strategy that is structured to earn a limited profit when the underlying security is perceived to have little volatility. A total of 4 legs are involved in the condor options strategy and a net debit is required to establish the position.

Condor – Long Strategy: 

Condor – Long Strategy Long Call Condor is one of the sideway strategies employed in a low volatile stock. It is usually a four-legged spread option strategy consisting of all calls with the same expiration date but different strike prices. With this stock option trading strategy, the outlook is directional neutral. The investors are expecting a drop in volatility or no movement from the underlying stock .

Advantages : 

Advantages Profit from a range bound stock with relatively lower cost outlay. Relatively higher risk/reward ratio if the stock remain range bound. Limited risk exposure when the underlying stock is beyond the two breakeven points on expiration date.

Disadvantages: 

Disadvantages Bid/Ask spread from the various option legs may adversely affect the profit potential of the strategy. The higher profit potential is only realized when the options are close to expiration date.

Profit: 

Profit Limited Profit The formula for calculating maximum profit is: Max Profit = Strike Price of Lower Strike Short Call - Strike Price of Lower Strike Long Call - Net Premium Paid - Commissions Paid Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls

Payoff: 

Payoff

Loss: 

Loss Limited Loss The formula for calculating maximum loss is: Max Loss = Net Premium Paid + Commissions Paid Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call

Break Even Point: 

Break Even Point Break Even Point There are two break even points for the long condor strategy. Upper Breakeven Point = Strike Price of Highest Strike Long Call - Net Premium Received Lower Breakeven Point = Strike Price of Lowest Strike Long Call + Net Premium Received

Exiting the Trade: 

Exiting the Trade Offset the position by buying back the call options that you sold and selling the options that you have bought in the first place. As the underlying stock fluctuate up and down, advance option traders may choose to unravel the spread leg by leg. In this way, the trader will leave one leg of the spread exposed while he profit from the closure of the other legs.

Example: 

Example XYZ is trading at Rs.68 a share on October 2011. It had just announced its earning result and no major news for XYZ is expected in the near future. Based on your analysis, you believe that the stock will trade within Rs.60 to Rs.75 within the next month. In this case, you may consider to buy one Rs.60 strike call at Rs.8.60, sell one Rs.65 strike call at Rs.4.90, sell one Rs.70 strike call at Rs.2.70 and buy one Rs.75 strike call at Rs.1.30, all expiring in November 2011.

PowerPoint Presentation: 

Maximum Risk = Limited to the amount of Net Premium Paid = ($8.60 - $4.90 - $2.70 + $1.30) = Rs.2.30 Maximum Reward = Limited to the different in adjacent strikes less net premium paid = ($5.00 - $2.30) * 100 = $2.70 Upside Breakeven = Highest Strike Price Less Net Premium Paid = $75 - $2.30 = $72.30 Downside Breakeven = Lowest Strike Price Add Net Premium Paid = $60 + $2.30 = $62.70

PowerPoint Presentation: 

Time decay is generally helpful in this strategy when it is profitable and harmful when it is in a loss position. Therefore it is preferably to use this option trading strategy with around 1 month left to expiration so as to give yourself less time to be wrong.