Long Call Condor

Condor

1) Deduce the motivation of the strategy

A long call condor is a four-legged spread option strategy consisting of all calls with the same expiration date but different strike prices. It will therefore have 1 In The Money (ITM) Long Call + 1 ITM Short Call + 1 Out Of The Money (OTM) Short Call + 1 OTM Long Call. The reasons driving investors into adopting it mainly emanate from the way it is formulated. The first reason is that they provide known and fixed maximum gain and loss. The maximum risk and reward are known from the outset of the trade. The risk is equal to the debit paid for the trade and is incurred if the underlying moves too far in either direction. With the notion of investors being risk averse, knowing the gains or losses prior to engagement will assist prospective investment plans and procedures.

Another driving force to using the condor would be the desire by investors to profit from a range bound stock with relatively lower cost outlay.

A long condor is also an effective strategy for capturing any perceived excessive volatility risk premium, which is the difference between the realized volatility of the underlying and the volatility implied by options prices. Other motivations are that of investors who seek regular income from their trading capital.  A buyer will attempt to construct the trade so that the short strikes are close enough that the position will earn a desirable net credit, but wide enough apart so that it is likely that the spot price of the underlying will remain between the short strikes for the duration of the options contract.

There is also limited risk exposure when the underlying stock is beyond the two breakeven points on expiration date. This is found by the minimum of the difference

between the lower strike call spread less the higher call spread less the total premium paid for the condor.

2) Deduce/ Construct the payoff table

This strategy is suitable for an investor who is range bound. The...