Condors consist of 4 options in two spreads combined together, facing the other. The initial stock price will be somewhere between the two inner options. Condors can use four calls or four puts, but all options are the same. For a mix of puts and calls see an Iron condor.
For long condors, the two outside options are purchased and the two inside options are sold. If price is dead center the condors are neutral, if price is below dead center the condors are bullish, and if price is above dead center the condors are bearish. If the stock price remains between the two center options, the play results in maximum purchase profits. Long condor buyers need the price to stay in this zone. If price moves between a mid-point and an outer point the trade will result in some profit or some loss. If price moves beyond an outer point the condor will result in complete loss.
For a short condor, the two outside options are sold and the two inside options are purchased. If price is dead center the condor is neutral, if it is below dead center the condor is bearish, and if it is above dead center the condor is bullish. If the stock price remains between the two center options, the play results in maximum loss. If it moves between a mid-point and an outer point the trade will result in some profit or some loss. If it moves beyond an outer point the trade will result in maximum profit. Short condor sellers need a wide price swing to acquire profit from a trade. Due to the wide amount of movement required and capped upside profit, short condor sellers might consider long straddles or long strangles instead of this play. These alternative plays also remove the possibility of being assigned to an exercise, which ruins the trade. They make the trader vulnerable to a higher amount of time value loss if movement does not occur.
Strike Prices & Profitability
For both long and short condors, the width between the outer and inner points should be the same on both sides. The distance between the inner points can be widened or narrowed for effectiveness, but it will affect the cost or premium earned to open the position, and thus the losses and profits earned.
Condors & Assignment
Condors can be completely dismantled if either option sold is assigned during the trade. The risk is highest when price is above a single purchased and two sold options during a condor trade. If you are assigned on either of the two short options, you may be forced to unwind a large portion of the condor or close the position entirely in a zone of relatively low value or loss. Many use condors on index options, which are European options that cannot be exercised early. Indexes usually have lower volatility than equities, which increases the likeliness they will finish inside of a long condor. You can increase the chances of condors being successful by measuring the standard deviation of price movement, and then opening the condor with the outer boundaries near or outside of that range, if profitable. Note that this may reduce profits earned from your positions.
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