A condor spread is similar to a butterfly spread and is the simultaneous establishment of both a bull spread and a bear spread on the same underlying security. A condor spread however, has two inner strikes in the center of the position instead of one in a butterfly spread. A condor spread contains four options with four strike prices and is effectively two spreads stacked on each other. A sophisticated options trader would establish a long condor spread when they expect the underlying security or index to remain in a period of low volatility. An investor who establishes a long condor spread is effectively neutral on the underlying security and does not expect a large price move. A long condor spread is established as a debit spread. Like all debit spreads, the investor’s maximum loss will be equal to the net debit paid to establish the position. The investor’s maximum gain for the position will be the same as for other spreads, the difference between the strike prices minus the net debit. A condor spread, like a butterfly spread and a straddle, will have two breakeven points. The breakeven point for the upper end of the position will be the higher strike price minus the debit. The breakeven point for the lower end of the position will be the lower strike price plus the debit. A long condor spread could be established as follows:
Buy 1 XYZ June 85 call at 2
Sell 1 XYZ June 80 call at 4
Sell 1 XYZ June 75 calls at 6
Buy 1 XYZ June 70 call at 9
The investor established the position for a net debit of 1 or $100. Using the above formulas, we determine that the investor will:
Have a maximum loss of 1 or $100
Have a maximum gain of $400 (5 point spread – debit)
Have a lower breakeven of 71 (lower strike price + debit)
Have an upper breakeven of 84 (higher strike price – debit)
The investor will realize the maximum gain on a long condor position when the underlying security is between the two short strike prices at expiration
An investor would establish a short condor if they expect a large move in the price of the underlying security. The seller of the condor like all option sellers has a maximum gain equal to the net credit received. The seller will realize the maximum gain if the underlying security is above or below the outer strike prices or the wings of the position at expiration.
Questions on condor spreads can appear on both the series 4 and series 9 exams. Be sure you are ready to pass your exam with our text books and exam prep software.