The Condor Option Spread
Outlook: Low Stock Volatility
The Condor Option Spread is to be used when you think a stock will not go up or down very much, which means it is not very volatile. To open a condor option spread you have to make four trades: You sell a call with a strike price higher than the current market price, and buy a call with a strike price even higher than the call you sold. You also sell a put with a strike price lower than the current market price, and buy a put with a strike price even lower. You then hope that the stock will fall between the call and put you sold at the date of expiration, which means all of the options you traded will expire worthless.
Example: The DIA trades at 100.00. You think it won't go up or down over the next month, so you setup a condor.
Sell a call with a strike $103, taking in $180
Buy a call with a strike $105, spending $60
Sell a put with a strike $98, taking in $150
Buy a put with a strike $96, spending $50
Your net initial cash flow is $220 (excluding commissions), so if the stock closes between $98 and $103 on expiration, all of the options expire worthless and you make a profit of $220.
Condor Option Spread Payoff Graph
A = Strike Price of Put Bought
B = Strike Price of Put Sold
C = Strike Price of Call Sold
D = Strike Price of Call Bought