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A Short 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: Short, Long, Long, and Short. The intervals are equal from the highest short strike to the highest long strike, highest long strike to lowest long strike, and lowest long strike to lowest short strike. Expirations for each strike are the same. This trade results in a net premium received (credit) upon initial order entry.
Uses The option trader who uses this strategy has a volatile outlook and expects the underlying security to close at or above or below the short strike at expiration. Risks This strategy is considered to have limited risk and limited reward. The maximum gain occurs when the stock price closes at or below the lowest short strike or at or above the highest short strike by expiration. The maximum gain amount is equal to the initial credit received upon entering the trade. The maximum loss will occur if the stock price remains between the middle strikes by expiration. Steady movement up (or down) causing the underlying stock to trade away from the middle strikes will result in an increase in strategy value. Increasing implied volatility may have a positive impact on this strategy. Option traders electing to close the position before expiration could be impacted by decreasing 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 outer strikes. The closer the current price of the underlying security to the short outer 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 outer strikes. This situation may also result in one of the outer 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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