Short Call Condor Options Strategy

Specific options strategies work best when markets are about to turn volatile. A short call condor strategy works best in a neutral market scenario, irrespective of market trend direction. This strategy demands high implied volatility and prompts market movement in either direction.

What is the short call condor options strategy?

A short call condor in a four-legged strategy consists of selling one in the money call, buying one lower or middle strike in the money call, buying one higher middle strike OTM call, and selling one OTM highest strike call. All options for this strategy should have the same underlying and expiration.

A short call condor is a limited risk and reward strategy. It works best when the markets are volatile. The quantity for trade should be the same for all option strike prices.

When to initiate a short call condor options strategy?

The strategy should be initiated when a trader expects significant rise in volatility. The ideal situation to trade this strategy is during a price breakout or breakdown. Risk and reward are defined in this strategy.A trader can carry the position forward for the next trading day.

How to use a short call condor options strategy?

The table below shows different strikes of the Nifty50 Index concerning their price and type of options, all having the same expiration. The contents of this table will be discussed further below for the analysis of the Short Call condor strategy.

Assuming the Nifty50 index trading at 17,800 levels and its options strike At The Money, the different strike prices would be: 

Objective of this strategy is an expectation of a high price move in either an upward or downward direction. Based on it, here’s how one can select a strike price.

• Sell CALL option with 17,700 strike at ₹350 (ITM)
• Buy CALL option with 17,750 strike at ₹280 (ITM)
• Buy CALL option with 17,850 strike at ₹100 (OTM)
• Sell CALL option with 17,900 strike at ₹60 (OTM)

The spread will become a credit spread, so the cost of the strategy will be reduced.

Choosing strike price

Assuming Nifty50 is currently trading at 17,800 and expecting a sudden spike in volatility and a rise in the options price, the different strike prices will be: 

Strike 1. Sell an ITM CALL of 17,700 at  ₹350 (+)

Strike 2. Buy an ITM CALL of 17,750 at  ₹280 (-)

Strike 3. Buy an OTM CALL of 17,850 at  ₹100 (-)

Strike 4. Sell an OTM CALL of 17,900 at  ₹60 (+)

Positive and negative signs denote the inflow and outflow of premiums, respectively.

This strategy is a net credit strategy, as premiums collected are greater than premiums paid.

Total Premium Received    =   ₹(350+60)

Total Premium Paid             =   ₹(280-100)

Net Premium Received       =   ₹(350+60) – ₹(280+100) 

                                                =  ₹30

The premium received will reduce the loss in this strategy if it fails to profit.

Profit potential

A short call condors profits when markets are about to break the price range in either an upward or downward direction. Suppose Nifty50 is trading between 17,700 and 17,900 for a while and is expected to break the upper range; in this scenario, long ITM and OTM call prices will rise and add to profits in the strategy.

In another scenario, if the Nifty50 index falls, breaking the level of 17,700, the strategy will profit from sold OTM and ITM call options. The strategy will only succeed if the Nifty50 Index moves beyond the range of 17,700 and 17,900 until expiration.

Payoff

Source: https://tse2.mm.bing.net/th?id=OIP.JuYK8CYtAAeOPvvSfcSySQHaFC&pid=Api&P=0

The diagram above shows payoff structure of short call condor, vertical axis showing the amount of profit/loss and horizontal axis showing price change in underlying till expiration. Let’s analyze the payoff diagram in relation to the strike price selected for the strategy.

Assuming Nifty50 is at 17,800

Strategy: Short Call Condor

Strike Price for the trade

1. Sell at 17,700 (ITM)
2. Buy at 17,750 (ITM)
3. Buy at 17,850 (OTM)
4. Sell at 17,900 (OTM)

The strategy will become unprofitable with a limited loss if the market closes between 17,750 and 17,850. A short call condor will generate a limited profit after breaking 17,900 levels in the case of an upward move and 17,700  in the case of a downward move.

Risk Reward

• A short call condor has a limited profit and limited risk payoff structure.
• The strategy remains profitable when the market is volatile, with a high-frequency price movement in the underlying assets.
• The maximum reward is limited beyond two sold call options i.e., net premium and becomes unprofitable if the price doesn’t exceed the two bought call options. 
• Since maximum loss is limited, it is advisable to trade this strategy during any events or corporate announcements.
• To increase the profit probability of this strategy, a trader must choose a near distance strike between two bought call options.

Break-even

The break-even of short call condor is calculated as follows:

Lower Break Even Point = (Sold ITM Call + Net Premium Received)

                                           = ₹(17,700 + 30)

                                           = ₹17,730

Upper Break Even Point = (Sold OTM Call – Net Premium Received)

                                           = ₹(17,900-30)

                                           = ₹17,870

Maximum Profit Potential = (Net premium received)* (lot size)

                                               = ₹(30*50)

                                               = ₹1,500

Maximum Loss = (Bought ITM Call – Sold ITM Call – Net Premium Received)* Lot size

                            = ₹(17,750 – 17,700-30)*50

                            = ₹1,000

The strategy will have a maximum capped loss between long calls of 17,750 (ITM) and 17,850 (OTM).

Analysis of short call condor options strategy

If the Nifty50 Index remains between 17,700 and 17,900, the net delta would remain neutral, i.e., close to zero. Short call condor is a vega-positive strategy; therefore, one should implement it when expecting a rise in volatility.

Theta will have a negative impact on short call condors; the option premiums of 17,750 and 17,850 will fizzle out as the expiration date comes nearer.

The gamma of a short call condor will drop if the Nifty50 moves above the highest 17,900 or below the 17,700 strike price.

Final Word

A short call condor strategy has a balanced risk-reward composition, which makes the strategy potent enough for long-term income generation. While constructing a short call condor, a trader must seek the narrow gap between the strikes.

This will result in better returns as compared to the risk involved. The topic above covers the appropriate aspects, techniques and scenarios for deploying this strategy. Before making any trading decision, follow the information provided on this topic.

Frequently Asked Questions