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A Long Condor is a multi-legged option strategy consisting of all calls or all puts. There are two short option strikes and two long option strikes, each with different strike prices. In descending order from high strike to low strike, the positions are: Long, Short, Short, and Long. The intervals are equal from the highest long strike to the highest short strike, highest short strike to lowest short strike, and lowest short strike to lowest long strike. Expirations for each strike are the same. This trade results in a net premium paid (debit) upon initial order entry.
Uses The option trader who uses this strategy has a neutral outlook and expects the underlying security to close at the middle strike at expiration. Risks This strategy is considered to have limited risk and limited reward. The maximum gain occurs when the stock price closes between the short strike prices by expiration. The maximum gain amount is calculated by taking the interval (high strike to middle strike or middle strike to low strike) and subtracting the premium paid upon initial order entry. The maximum loss will occur if the stock price falls below the lower middle strike or rises above the higher middle strike by expiration. Maximum loss is equal to the premium paid upon order entry. Steady movement up (or down) causing the underlying stock to trade away from the middle strike will result in a decrease in strategy value. Increasing implied volatility can have a slightly negative impact on this strategy. Option traders electing to close the position before expiration could be impacted by increasing implied volatility. Time decay impact on this strategy can vary depending on where the price of the underlying security is in relation to the short middle strikes. The closer the current price of the underlying security to the short middle strikes, the more favorably time decay may impact the strategy. Options traders have assignment and exercise risk on this trade. Early assignment (American Style) is a possibility when the short strikes are in-the-money. Also, the option trader runs the risk of uncertainty on assignment when the underlying security is close to one of the short middle strikes. This situation may also result in one of the middle strikes still having some time premium on the last day of trading prior to expiration. The option trader should be aware of these risks prior to implementing this strategy.
Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options. |
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