What are the characteristics of this option strategy?
Condor spreads are a defined risk, low profit, neutral strategy. A condor has characteristics similar to a butterfly spread, but spreads the middle of the butterfly into two separate short strikes so the profitable zone is a range rather than a point. It is designed to take advantage of a narrow trading range by opening four legs at the same expiration: two short options bracketing the expected range and two long options further out that cap the loss on each side. Built from four calls or four puts it is the plain condor; built from a call credit spread above the market and a put credit spread below it, as in the example further down, it is the iron condor. Either way the goal is the same, to keep the credit collected when the underlying finishes between the two short strikes.
Is this a bullish, bearish, or neutral strategy?
The Condor option strategy is a neutral strategy, meaning it is designed to take advantage of a sideways trend in the underlying asset.
Is this a beginner or an advanced option strategy?
The Condor option strategy is an advanced strategy and requires a good understanding of the underlying asset and the dynamics of option trading. This strategy is not recommended for beginners.
In what situation will I use this strategy?
The Condor option strategy is typically used when the underlying asset is expected to remain within a fixed range for a set period of time but with low volatility. It appeals to traders who want a known worst case, since the long wings cap the loss on both sides, and who are willing to accept a small profit for a high chance of collecting it.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward and probability of profit of the Condor option strategy vary depending on the individual setup. Generally, this strategy has a high probability of profit and a low reward relative to risk: it wins whenever the underlying finishes between the two short strikes, but the maximum loss at the wings is larger than the credit collected.
How is this strategy affected by the greeks?
The greeks affect the Condor option strategy in the same way as other option strategies since the greeks measure the sensitivity of an option’s price to changes in different factors. For a Condor spread the net delta is close to zero while price sits mid-range: the call legs contribute negative delta when short and positive when long, the put legs the reverse, and the position is short gamma and positive theta inside the range.
In what volatility regime (i.e., VIX level) would this strategy be optimal?
The Condor option strategy is designed to take advantage of a narrow trading range with low volatility, so it is best used when the VIX level is low.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Condor option strategy when the trade is going against your position can be difficult since it requires understanding and anticipating the underlying asset’s movements. Generally, the more educated the trader is about the underlying asset, the easier it is to adjust the position.
Where does this strategy typically fall in the range of commissions and fees?
The range of commissions and fees for the Condor option strategy is similar to that of other option strategies since it involves opening multiple legs on both a call and a put option. Generally, the Condor option strategy is more expensive than other strategies because of the multiple legs.
Is this a good option income strategy?
The Condor option strategy is widely used as an income strategy, because it collects a credit up front and has a high probability of profit, with the trade-off that the loss at the wings is several times the credit. This strategy is usually used as a way to generate profits when the underlying asset is relatively stable and has low volatility.
How do I know when to exit this strategy?
The best way to know when to exit the Condor option strategy is to monitor the underlying asset’s movements closely and anticipate future movements. Traders should also be aware of when their options will be expiring in order to maximize profits and minimize losses.
How will market makers respond to this trade being opened?
Market makers will generally respond to the opening of a Condor option strategy by hedging their position and seeking to gain from the spread.
What is an example (with calculations) of this strategy?
An example of a Condor option strategy, with MSFT trading around $255, is one where you write a $265 call along with a $245 put, anticipating range bound trade in the $245 to $265 band. The trade is hedged by buying a $275 call and a $235 put, all four legs in the same expiration. Say the two short legs bring in more than the two long legs cost, for a net credit of $3 per share, or $300 per condor. If MSFT finishes anywhere between $245 and $265 all four options expire worthless and the trader keeps the $300, which is the maximum profit. The wings are $10 wide, so the maximum loss is $1,000 less the $300 credit, or $700, and it is taken if MSFT finishes at or below $235 or at or above $275. The breakevens are $242 on the downside and $268 on the upside. Note the shape of that trade: the $300 won inside the range is well under half the $700 lost at either wing, which is the trade-off for the high probability of the range holding. To run these numbers on your own strikes, use an Iron Condor Excel Template, or the Short Iron Butterfly Explained Excel Template.
In conclusion, the Condor option strategy is a defined risk, low profit, neutral strategy that can be used to take advantage of narrow trading ranges with low volatility, keeping in mind that the loss at the wings is several times the credit collected. This strategy is best employed when the trader has a good understanding of the underlying asset, and should be backed up with calculations using relevant Excel templates. The understanding of how to adjust the position when the trade is going against it could be the difference between success and failure. MarketXLS offers a range of Excel templates to help traders with option trading calculations, and provides them with the necessary support when setting up and adjusting their positions.
Here are some templates that you can use to create your own models
Iron Condor Option Strategy
Call Condor Spread
Long Albatross Spread
Short Condor Spread
Reverse Iron Condor Spread
Reverse Iron Albatross Spread
Short Albatross Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
“How Iron Condor and Strangle Options Differ”
Cut Complexity with Call Condor Spreadsheets
Maximizing Profits with a Bull Put Spread Strategy
Option Strategies For Professional Traders
Iron Condor Options Strategy – Video Explanation