Short Call Condor Options Trading Strategy

Nilesh Jain Nilesh Jain 10th December 2022 - 06:41 am

A Short Call Condor is similar to Short Butterfly strategy. The only exception is that the difference of two middle strikes bought has different strikes.

When to initiate a Short call condor?

A Short Call Condor is implemented when the investor is expecting movement outside the range of the highest and lowest strike price of the underlying assets. Advance traders can also implement this strategy when the implied volatility of the underlying assets is low and you expect volatility to go up.

How to construct a Short Call Condor?

A Short Call Condor can be created by selling 1 lower ITM call, buying 1 lower middle ITM call, buying 1 higher middle OTM call and selling 1 higher OTM calls of the same underlying security with the same expiry. The ITM and OTM call strikes should be equidistant.

Strategy	Sell 1 ITM Call, Buy 1 ITM Call, Buy 1 OTM Call and Sell 1 OTM Call
Market Outlook	Significant volatility above higher and lower strikes
Motive	Anticipating price movement in the underlying assets
Upper Breakeven	Highest strike price - Net credit
Lower Breakeven	Lowest strike price + Net credit
Risk	Limited (if expires above lower breakeven point and vice versa)
Reward	Limited to Net premium received
Margin required	Yes

Let’s try to understand with an example:

Nifty Current spot price	9100
Sell 1 ITM call of strike price (Rs)	8900
Premium received (Rs)	240
Buy 1 ITM call of strike price (Rs)	9000
Premium paid (Rs)	150
Buy 1 OTM call of strike price (Rs)	9200
Premium paid (Rs)	40
Sell 1 OTM call of strike price (Rs)	9300
Premium received (Rs)	10
Upper breakeven	9240
Lower breakeven	8960
Lot Size	75
Net premium received	60

Suppose Nifty is trading at 9100. An investor Mr. A estimates that Nifty will move significantly by expiration, so he enters a Short Call Condor and sells 8900 call strike price at Rs 240, buys 9000 strike price of Rs 150, buys 9200 strike price for Rs 40 and sells 9300 call for Rs 10. The net premium received to initiate this trade is Rs 60, which is also the maximum possible reward. This strategy is initiated with a view of significant volatility on Nifty hence it will give the maximum profit only when there is movement in the underlying security below 8900 or above 9200. Maximum profit from the above example would be Rs 4500 (60*75). The maximum profit would only occur when underlying assets expires outside the range of upper and lower breakevens. Maximum loss would also be limited to Rs 3000 (40*75), if it stays in the range of higher and lower breakeven.

For the ease of understanding of the payoff schedule, we did not take in to account commission charges. Following is the payoff schedule assuming different scenarios of expiry.

The Payoff Schedule:

On Expiry NIFTY closes at	Net Payoff from 1 Deep ITM Call Sold (Rs) 8900	Net Payoff from 1 ITM Calls Bought (Rs) 9000	Net Payoff from 1 OTM Call bought (Rs) 9200	Net Payoff from 1 deep OTM Call sold (Rs.) 9300	Net Payoff (Rs)
8600	240	-150	-40	10	60
8700	240	-150	-40	10	60
8800	240	-150	-40	10	60
8900	240	-150	-40	10	60
8960	180	-150	-40	10	0
9000	140	-150	-40	10	-40
9100	40	-50	-40	10	-40
9200	-60	-50	-40	10	-40
9240	-100	90	0	10	0
9300	-160	150	60	10	60
9400	-260	250	160	-90	60
9500	-360	350	260	-190	60
9600	-460	450	360	-290	60

The Payoff Graph:

Impact of Options Greeks before expiry:

Delta: If the underlying asset remains between the lowest and highest strike price the net Delta of a Short Call Condor spread remains close to zero.

Vega: Short Call Condor has a positive Vega. Therefore, one should buy Short Call Condor spread when the volatility is low and expect to rise.

Theta: Theta will have a negative impact on the strategy, because option premium will erode as the expiration dates draws nearer.

Gamma: The Gamma of a Short Call Condor strategy goes to lowest if it moves above the highest or below the lowest strike.

Analysis of Short Call Condor spread strategy

A Short Call Condor spread is best to use when you are confident that an underlying security will move outside the range of lowest and highest strikes. Unlike straddle and strangles strategies risk involved in short call condor is limited.