Condor Spread is a type of options trading strategy used in financial markets, particularly in options trading. It’s a complex strategy that involves four different options contracts with the same expiration date but different strike prices. Condor spreads are typically used when an investor expects limited price movement in the underlying asset and wants to profit from the resulting low volatility. Learn and trade with Capitalinvestopedia.
Explore how a Condor Spread works –
- Choose the Underlying Asset: Select the underlying asset (e.g., a stock) on which you want to trade options.
- Select Expiration Date: Choose the expiration date for your options contracts. All four options in the Condor spread should expire on the same date.
- Select Strike Prices: Determine four different strike prices for your options contracts. You’ll need two strike prices for call options and two strike prices for put options.
- Lower Strike Price for Call Options: This is typically referred to as the “lower call strike” and is chosen below the current market price of the underlying asset.
- Higher Strike Price for Call Options: This is referred to as the “higher call strike” and is chosen above the lower call strike but below the expected market price at expiration.
- Lower Strike Price for Put Options: This is the “lower put strike” and is chosen below the current market price of the underlying asset.
- Higher Strike Price for Put Options: This is the “higher put strike” and is chosen above the lower put strike but below the expected market price at expiration.
- Buy and Sell Options:
- Buy Call Options: Buy one call option with a higher strike price.
- Sell Call Options: Sell one call option with the lower strike price.
- Buy Put Options: Buy one put option with a higher strike price.
- Sell Put Options: Sell one put option with the lower strike price.
- Calculate Maximum Profit and Maximum Loss: The maximum profit and maximum loss for a Condor Spread depend on the difference between the strike prices and the premiums paid or received for each option.
- Market Conditions:
- Maximum Profit: Achieved if the underlying asset closes at a price between the two middle strike prices at expiration.
- Maximum Loss: Occurs if the underlying asset closes at a price outside of the two outer strike prices at expiration.
- Breakeven Points: Determine the breakeven points where you neither profit nor lose money.
Condor spreads are a neutral strategy that profits from low volatility. They are limited-risk strategies, meaning that your potential losses are defined, and they can be used in both bullish and bearish market conditions, as long as the underlying asset remains within a certain price range.
