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Short Call Condor Spread-Neutral Strategy

Options-Trading-Beginners

Explanation

Short Call Condor Spread is the opposite of Long Call Condor Spread. A Short Call Condor is a volatile market strategy which is executed for credit investment, meaning that the trader receives premium for executing this strategy. In order to make profit through this strategy, the underlying asset should fulfill he underlying assumption and should break above the higher strike price or below the lower strike price at expiration.

This 4-leg option strategy involves selling one Deep in-the-money (ITM)call, buying 1 in-the-money (ITM)call, buying 1 out-of-the-money (OTM)call, selling 1 deep out-of-the-money (OTM) call at different strike price with the same expiry date. The risk and reward both are limited.

A shortcall condor is similar to a short Butterfly strategy, wherein the only exception is that the difference of two middle strikes bought has separate strikes.

Reward:

Max. Reward potential is the net credit received. There are two possible scenarios for reward

  1. if the stock price is below the lowest strike price, all calls expire worthless
  2. if the stock price is above the highest strike price, all calls are in the money and the net credit is kept as income.

Risk:

Maximum loss is incurred if the underlying asset price stays between the middle two strike prices on the expiration date.

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Construction:

Sell 1 Deep ITM Call Option

Buy1 ITM Call Option

Buy1 OTM Call Option

Sell 1 Deep OTM Call Option

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 27/04/2023 42800.0 146.55 Buy 1
CALL 27/04/2023 42700.0 196.75 Buy 1
CALL 27/04/2023 42600.0 258.05 Sell 1
CALL 27/04/2023 42900.0 104.8 Sell 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
596.55 -496.55 42103.45 43396.55

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Payoff 4 Net Premium Option PayOff At Expiry
42000.0 0.0 0.0 0.0 0.0 19.55 19.55
42100.0 0.0 0.0 0.0 0.0 19.55 19.55
42200.0 0.0 0.0 0.0 0.0 19.55 19.55
42300.0 0.0 0.0 0.0 0.0 19.55 19.55
42400.0 0.0 0.0 0.0 0.0 19.55 19.55
42500.0 0.0 0.0 0.0 0.0 19.55 19.55
42600.0 0.0 0.0 0.0 0.0 19.55 19.55
42700.0 0.0 0.0 -100.0 0.0 19.55 -80.45
42800.0 0.0 100.0 -200.0 0.0 19.55 -80.45
42900.0 100.0 200.0 -300.0 0.0 19.55 19.55
43000.0 200.0 300.0 -400.0 -100.0 19.55 19.55
43100.0 300.0 400.0 -500.0 -200.0 19.55 19.55
43200.0 400.0 500.0 -600.0 -300.0 19.55 19.55
43300.0 500.0 600.0 -700.0 -400.0 19.55 19.55
43400.0 600.0 700.0 -800.0 -500.0 19.55 19.55
43500.0 700.0 800.0 -900.0 -600.0 19.55 19.55
43600.0 800.0 900.0 -1000.0 -700.0 19.55 19.55

 

Payoff Chart

 

Example

The Bank Nifty is trading at 42800 levels, the trader sees volatility and implemented short call condor spread. Implementation of the strategy involves selling 142600 Deep ITM Call Option for a premium of Rs. 258, long 1 42700 ITM Call Option by paying a premium of Rs. 197,bought another 42800 OTMCall Optionfora premiumofRs.147, shorted1 42900 Deep OTMCallOption ata premiumofRs. 105. Total funds inflow at the beginning of the implementation is equal to Rs. 475 (258 + 105 – 147 – 197) * 25.

Scenario1:

if at the time of expiry, the bank nifty falls below the deep IMT call, the trader will keep the net premium received and close the position. The profit will be equal to Rs 488 as shown in table above.

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    Scenario 2:

     But if the index stayed range bound and closed in range of long call options. The losses will be limited but occur equal to Rs. 2000.

    Scenario 3:

    If the Bank nifty closes above the OTM short call option, the trader will keep the net premium received and square off the position with gains of Rs. 490 as shown in table above.

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