Scribd
Upload
74 views

Long Call Condor: Montréal Exchange

This document summarizes a long call condor options strategy. A long call condor consists of being long one in-the-money call, short one higher in-the-money call, short one middle out-of-the-money call, and long one highest out-of-the-money call, all with the same expiration. It profits if the underlying stays between the two short call strikes at expiration. The maximum gain is the difference between the short call strikes less premium paid, while the maximum loss is the net debit paid to open the position. Time decay benefits the strategy while increased volatility generally harms it.

Uploaded by

pkkothari
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
74 views

Long Call Condor: Montréal Exchange

This document summarizes a long call condor options strategy. A long call condor consists of being long one in-the-money call, short one higher in-the-money call, short one middle out-of-the-money call, and long one highest out-of-the-money call, all with the same expiration. It profits if the underlying stays between the two short call strikes at expiration. The maximum gain is the difference between the short call strikes less premium paid, while the maximum loss is the net debit paid to open the position. Time decay benefits the strategy while increased volatility generally harms it.

Uploaded by

pkkothari
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Equity Options

Strategy

MONTRÉAL EXCHANGE
Bear Put Spread

Long Call Condor


Description
A long call condor consists of four different call options of the same expiration. The strategy is constructed of 1
long in-the-money call, 1 short higher middle strike in-the-money call, 1 short middle out-of-money call, 1 long
highest strike out-of-money call.

An alternative way to think about this strategy is an in-the-money bull call spread (debit spread) coupled with an
out-of-the money bear call spread (credit spread) with the bear call spread at higher strikes than the bull call
spread.

Outlook
The long call condor investor is normally looking for little or no movement in the underlying.

Summary
This strategy profits if the underlying security is between the two short call strikes at expiration.

Long Call Condor Example


Net Position
+ Long 1 XYZ 55 Call
Short 1 XYZ 60 Call
Short 1 XYZ 65 Call
Long 1 XYZ 70 Call
0
50 55 60 65 70 MAXIMUN GAIN
(Lowest, short call strike – lowest, long call strike) – Net
premium paid

- MAXIMUN LOSS
Net premium paid

Motivation
Anticipating minimal price movement in the underlying during the lifetime of the options.
Variations
This strategy is a variation of the long call butterfly.

Instead of a body and two wings, the body has been split into two different (short call) strikes so that there are two
shoulders in the middle and two wingtips outside the shoulders.

Maximum Loss
In all circumstances the maximum loss is limited to the net debit paid (assuming the distances between all four
strikes prices are equal). The maximum loss would occur should the underlying be below the lowest long call
strike at expiration or at or above the highest long call strike. At the lowest strike all the options would expire
worthless, and the debit paid to initiate the position would be lost. At expiration, all the options above the highest
strike would be in-the-money and the resulting profits and losses would offset.

Maximum Gain
The maximum gain would occur if the underlying security is between the two short call strikes at expiration. In
that case, the lower strike long call is worth its maximum value. The profit would be the difference between the
strikes less the premium paid to initiate the position.

Profit/Loss
The potential profit and loss are both limited. In essence, a long call condor at expiration has a minimum value
of zero and a maximum value equal to the distance between the strike prices. An investor who buys a long call
condor pays a premium somewhere between the minimum and maximum value and profits if the condor’s value
moves toward the maximum payoff as expiration approaches.

Breakeven
There are two breakeven points. This strategy breaks even if at expiration the underlying security is above the
lower long call strike plus the amount of premium paid to initiate the position or if the underlying is below the
highest long call strike less the premium paid.

Downside breakeven = lowest long call strike + premium paid

Upside breakeven = highest long call strike - premium paid

Volatility
All other things being equal, an increase in implied volatility if the underlying is between the two short strikes
when established would have a negative impact on this strategy. As with most strategies however, the impact
of implied volatility changes will depend on strike selection relative to the stock price when the position is
established.

Time Decay
All other things being equal, the passage of time will have a positive impact on this strategy.

Assignment Risk
In the case of American style options, the short options that form the body of the long call condor are subject
to assignment at any time. Should early assignment occur on the short call options, the investor can exercise
the appropriate long option but may be required to borrow or finance stock for one business day. The resulting
position from an assignment on both short calls may still result in a net short stock position. Investors can avoid
an assignment by closing out their position if the short calls appear to be candidates for an early exercise.

2
Be aware of situations where the underlying is involved in a restructuring or capitalization event, such as a
merger, takeover, spin-off or special dividend, as that could completely upset typical expectations regarding early
exercise of options on the security.

Expiration Risk
Investors face an uncertainty when the underlying trades above both short call strikes but below the highest long
call strike. In this case, the investor is likely to be assigned on both short calls resulting in a short position that is
unhedged following expiration. Investors in this case would be subject to an adverse move the next business day.

Comments
One important consideration of the long call condor is assignment risk. If the underlying is above both short call
strikes yet below the highest long call strike, an assignment would result in both short calls delivering stock yet
only one of the long calls being exercised. Thus, the investor would end up net short the underlying.

Another consideration for the long call condor is commission charges. As there are four different contracts
traded, that may entail four separate commission charges to establish the position and four additional
commission charges if the trade is closed prior to expiration. Investors should understand their commission costs
before entering into this transaction.

Related Position
Comparable Position: Short Condor (Iron Condor)

You might also like