Condors come in all shapes and forms, but are always based on a two opposite vertical spreads: a put credit spread and a call credit spread, making the combination market neutral to somewhat biased in one direction. It is important to know the characteristics of this trade prior to tackling the Weirdor with which it shares the same basic features: Delta-neutral, Vega-negative and Theta-positive like most income trades.
For some reason, the Condor is generally the first trade for anyone fairly new to options wanting a low-risk income strategy. Most beginners indeed look at it the same way as individual spreads, placed far OTM hoping to stay out of trouble thanks to statistics. Unfortunately looks can be deceiving and that approach can lead to surprises. Apparent simplicity is no excuse for an absence of method, and we shall here watch Delta and try and anticipate adjustments: a Condor is hardly ever a ‘set & forget’ type of trade…
One thing one needs to realise is that a Condor has typically a poor risk/reward ratio (20% at best). This means that the required margin is relatively high in relation to the expected return at expiration, and even higher considering it is NOT recommended to keep it on as expiration approaches (high Gamma risk).
The Condor is like all OM strategies a limited risk – limited profit type of strategy:
Maximum profit for the long condor option strategy is achieved when the stock price falls between the 2 middle strikes at expiration. It can be derived that the maximum profit is equal to the difference in strike prices of the 2 lower striking calls less the initial debit taken to enter the trade.
- Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Lower Strike Long Call – Net Premium Paid – Commissions Paid
- Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls
The maximum possible loss for a long condor option strategy is equal to the initial debit taken when entering the trade. It happens when the underlying stock price on expiration date is at or below the lowest strike price and also occurs when the stock price is at or above the highest strike price of all the options involved:
- Max Loss = Net Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call
There are 2 break-even points for the condor position. The breakeven points can be calculated using the following formulae:
- Upper Breakeven Point = Strike Price of Highest Strike Long Call – Net Premium Received
- Lower Breakeven Point = Strike Price of Lowest Strike Long Call + Net Premium Received
The Condor Family
There are a number of variations on this theme. From a pure Condor perspective, one can distinguish:
- The Low-Prob Condor (mid Delta)
- The High-Prob Condor (low Delta)
- The No-Touch Condor (high Delta)
- As well as
- The V-Condor (from John Locke)
- The TEA-Condor (from Andrew Falde)
- And probably many more, like for instance Broken Condors
Some even look at it from a Butterfly angle as a “split strike Butterfly” and all its variants like BSSB (Broken Wing Split Strike Butterflies). As always, it is an absolute requirement to have a good control of Greeks to understand the nuances between those variations.
The High-Prob Condor
- Better liquidity than either Put or Call Condors
- Initially placed with shorts around 10 Delta or less (and more than 1 SD)
- Conundrum: Lower Delta also means lower premiums
- IV skew may often mean that strikes are not equidistant from ATM and some initial short Delta (adjustable with spreads though as per picture)
- 14-17 Delta for Low Prob, 30 for No Touch
- Spreads are ~20 points wide on RUT or SPX (10 points on high priced stocks)
- Risk/Reward: 4.5 – 5 to 1
- Probability of success: ~ 80 to 85%
- Entry: 30-60 DTE
Typical Condor Adjustments
The Condor must be traded as a strangle, i.e. always watch the shorts!
- When Delta of short option increases by 10 (i.e. 20-25), or
- P&L down ⅓ to ½ of max loss, or
- Delta / Theta ratio 1:1 whichever comes first
- Pre-emptive adjustments are possible if warranted by market configuration
The objective is to cut Delta (by half, up to 2/3 is position is losing), and cut risk!
- Add Debit Spread (any time, check prices)
- Long Put/Call if low IV environment (VIX ~ 14-16)
- Reduce or roll bad side
- Rolling good side? Generally a bad idea: Beware of whipsaws!
- Other adjustments touching on other “Fab Four” strategies:
- Butterfly “BatMan” by adding a debit spread turning the credit spread into a butterfly
- Calendar on or close to short strikes
- Diagonal on long strike
- Further OTM one month out Put or Call
- Just take it off and reposition if more than 30-DTE left in the trade (risk management does not have to include adjustments)
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