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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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  • Short Call Condor - Expanding The Butterfly 0 comments
    May 11, 2013 9:01 AM

    A variation of the short call butterfly is the short call condor. Instead of one middle range strike price, this volatility strategy has two.

    In the short call condor, you combine one in-the-money short call with one in-the-money long call; and one out of the money long call and one out of the money short call. The position is neutral in terms of the direction of the underlying price movement.

    Example: The underlying stock is trading at approximately $36.50 per share. You expect the price to either rise or fall substantially. A rumor is out that the company may be acquired. If true, the offer is expected to be far higher than current price; if it falls through, you believe the stock price will tumble many points. This is a perfect situation for the short call condor. Volatility in either direction will create profits.

    You set up the position by selling one 30 strike call at 7 and buying one 35 strike at 3.50; you also buy one 40 strike at 1 and sell one 45 strike at 0.50. Your net credit (before transaction costs) is $300. All of these calls expire on the same date three months away. The outcome at various prices demonstrates that with movement of the stock in either direction, profits are going to be realized. The maximum profit is $300 if the stock price ends up at $30 or lower or at $50 or higher by expiration:

    Value at expiration

    Stock short long long short

    Price 30 35 40 45 total

    20 700 - 350 - 100 50 300

    25 700 - 350 - 100 50 300

    30 700 - 350 - 100 50 300

    35 200 - 350 - 100 50 - 200

    40 - 300 150 0 50 - 100

    45 - 800 650 400 0 250

    50 -1,300 1,150 900 - 450 300

    55 -1,800 1,650 1,400 - 950 300

    As long as the stock price remains within the middle zone, losses are minor. The advantage to this strategy is that you collect premium for opening the combined short and long, and you can close the short calls at any time. As long as volatility is high, you will profit whether the stock moves up or down. The disadvantage is that returns are small compared to some other straddle positions, but risk in those alternatives is likely to be greater as well.

    All complex option strategies have to be judged based on their overall merit, limited risk and exposure to loss. In addition, a broker will require margin maintenance for positions like the short call condor, which ties up capital until either expiration occurs or then position (or the short portions of it) are closed. The elegance of limited profits in exchange for limited losses has to be judged with these factors in the balance.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one just released.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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