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Short Call Condor - An Option Trading Strategy

Today, we shall learn about the short call condor option strategy in the options market. This strategy is a neutral strategy having limited risk and limited reward. The strategy is best suitable for the highly volatile market.


The main objective of implementing this strategy is to profit from the stock price movement beyond the uppermost and lowermost strike price of the position.


When to use this strategy?

The strategy is best to be implemented when traders are expecting an excellent price movement in the underlying asset in either direction during the life of the options.


When the market is highly volatile, but you are not sure of the direction of the movement, then using a short-call condor would be a wise choice.


Highest profit or reward on short call condor strategy:

Traders may experience the highest gain when the underlying asset's price closes outside the range of the strike prices at the time of expiry.


Highest profit = strike price of Lower strike short call option - the strike price of lower strike long call - net premium paid.


Advantages of using the short call condor option strategy:

There are three significant benefits of using this strategy, as below:

  • Ability to profit from the highly volatile market of underlying assets in either direction.

  • The amount of profit may be low, but the strategy has a wider profit zone.

  • Make a profit with no or little investment, as you will have net credits of the premium.

How to enter the short call condor option strategy?

Traders can enter the short call condor by selling one lower-in-the-money call option, purchasing one lower-middle in-the-money call option, purchasing one higher-middle Out-of-the-money call option and selling one higher out-of-the-money call option contract. All the option contracts must be from the same underlying asset and have the same expiry time. The in-the-money and out-of-the-money strike prices must be equidistant; refer to the diagram below for a better understanding.


Breakeven points of short call condor strategy:

The strategy has two breakeven points, as below:

  • Lower Breakeven point = The lowest strike price - net credit received

  • Upper Breakeven points = The higher strike price - net credit received


How to exit from the strategy?

In order to exit from the strategy, traders have to reverse their existing position by selling the contracts they bought and buying back the contracts they sold.


Illustration

Eg. Nifty is currently trading @ 5500. Selling Call Option of Nifty having Strike 5300 @ premium 280, Strike 5700 @ premium 50 and Buying Call Option Strike 5400 @ premium 200, Strike 5600 @ premium 90 will help investor benefit if Nifty on expiry stays below 5300 or above 5700.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Short Call Condor

NIFTY (Lot size 50)

Sell Call

5300

280 (Inflow)

Buy Call

5400

200 (Outflow)

Buy Call

5600

90 (Outflow)

Sell Call

5700

50 (Inflow)

The Payoff Schedule and Chart for the above is below.


Payoff Schedule

NIFTY @Expiry

Net Payoff (Rs.)

5100

2000

5200

2000

5300

2000

5340

0

5400

-3000

5500

-3000

5600

-3000

5660

0

5700

2000

5800

2000

5900

2000


Short Call Condor - An Option Trading Strategy

In the above chart, the breakeven happens the moment Nifty crosses 5340 or 5660. The reward is limited to 2000 (calculated as Net premium received * Lot Size). The risk is limited to 3000 [calculated as (Difference in adjacent Sell and Buy Call strike prices - net premium received) * Lot Size].


Note: Similar strategy can be constructed using Put Options as well


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