Short Call Condor in Options Trading

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When investing in the Indian financial market, one thing to be certain: Risk. Market risk is the most common and universal within every asset class in the financial market. Although every asset class and investing instrument accompanies a different level of risk, it depends on the investors to choose them based on their risk appetite. As assets that have a high risk attached to them are considered to offer high returns, investors with high-risk appetites may invest in them even when they can lose their capital. On the other hand, some investors scout for asset classes that have a lower risk exposure and help them diversify or hedge against their other investments. If such investments have high risk, the idea behind diversification and hedging could be undermined.

What do investors do in such a case?

Primarily, they choose asset classes such as Options that come with no obligations and can mitigate risks. Options are contracts that grant the holder the right but do not bind them, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price. Options can be acquired with brokers through online trading accounts as with any other asset group. Secondly, once they have chosen an asset class such as Options, they dive into trying different low-risk strategies. As there are numerous options strategies with almost negligible risk, such investors utilize them to fulfill their goals of diversification, hedging, and making steady profits along the way.

One such low-risk options strategy is Short Call Condor Options Trading Strategy which combines two different Options Spreads to create a single low-risk options strategy. However, as it includes combining two strategies, it is better to understand some common terms you would need to learn about Short Call Condor Options Trading Strategy in detail.

What is Bull Call Spread?

A bull call spread is an Options Trading strategy in which the trader buys and sells the same number of Call Options at different strike prices with the same underlying asset and expiration date. The strategy is used for a net debit in the premium as the premium paid is always higher than the premium received. However, the trader realizes profits if the price of the underlying asset rises with time.

What is Bear Call Spread?

A bear call spread is a two-legged Options Trading technique that involves selling a Call Option with a lower strike price to collect an upfront premium and simultaneously buy a new one with a higher strike price. The underlying asset and the expiration date in both contracts are the same. The idea is to profit from the premium amount. As the premium for a short call (an options contract with a lower strike price) is higher than the premium amount of a Call Option Contract with a higher strike price, the investors realize profits in between.

Some terms associated with Short Call Condor Option Trading

  • Call Options: A Call Option is a contract wherein you win the right, but not the obligation, to buy a certain underlying asset at a decided-upon price and date between the contracting parties.

  • Put Options: A Put Option works exactly opposite to the call option. While the call option equips you with the right to buy, the put option empowers you with the right to sell the stock at the price on the date agreed upon by the contracting parties.

  • Strike Price: The price at which the options contract was initially bought or the pre-determined price.

  • Spot Price: The current price of the underlying asset is attached to the options contract.

  • Premium: It is the price you pay to the seller of the option for entering into the online trading options.

  • In-The-Money (ITM) call option: When the underlying asset price is higher than the strike price.

  • Out-of-the-money (OTM) call option: When the underlying asset price is lower than the strike price.

What is a Short Call Condor Options Trading Strategy?

A short call condor options trading strategy combines a Bull Call Spread and Bear Call Spread and makes up for a new options trading strategy. In a short call condor, an investor sells one lower ITM Call, buys one lower-middle ITM Call, buys one higher-middle OTM Call, and sells one higher OTM Call. The underlying asset and the expiry date are the same for all the calls.

A short-call condor options trading strategy is a neutral strategy that comes with limited risk exposure. However, the profit potential in short-call condors is also limited. A short call condor is similar in features to a Short Butterfly Strategy and is implemented by investors when they believe that the price movement may go outside the range of the highest and the lowest strike price of the contract’s underlying asset. If the current volatility in the market is low and the investors think it can go up in the future, they can implement the short call condor options trading strategy.

Understanding the Short Condor Options Trading Strategy

A short-call condor options trading strategy is implemented for the net credit of premium, which is also the highest profit one can earn through the strategy. However, an investor will incur the maximum loss equal to the difference in strike prices of the two calls will lower the strike price minus the initial credit taken for entering the trade. In general, a short call condor options trading strategy looks like the below:

For example, suppose the stocks of ABC company are trading at Rs 55 in August. For an investor to implement a short call condor options trading strategy, the transactions will look like the below:

  • Sell September ITM 45 Call – Rs 15
  • Buy September ITM 50 Call – Rs 10
  • Buy September 60 OTM Call – Rs 3
  • Sell September 65 OTM Call – Rs 2

The lot size is 100.

Net Credit of Premium: (15×100)-(10×100)+(3×100)-(2×100)= Rs 600

Scenario 1: Stock price goes down to Rs 45.

As all the contracts will expire worthlessly, the maximum profit will be the net credit of the premium. I.e. Rs 600.

Scenario 2: Stock price climbed to Rs 65.

  • Sell September ITM 45 Call : (45-65)x100 = -Rs 2,000
  • Buy September ITM 50 Call : (65-50)x100 = Rs 1,500
  • Buy September 60 OTM Call : (65-60)x100 = Rs 500
  • Sell September 65 OTM Call : Rs 0

Net Position: -2,000+1,500+500+0 = Rs 0

Initial credit of premium: Rs 600

Net Profit: Rs 600

However, in case the underlying asset’s price is between Rs 50-60, the investor will suffer the maximum loss. If the price movement is outside the range of Rs 50,60, the investor will make profits.

When to initiate short call condor options trading strategy?

As the short-call condor options trading strategy is neutral, it doesn’t depend on a bearish or bullish market. Investors initiate a short call condor options trading strategy when they believe that the current volatility in the market may increase. In such a case, if the expectation for the price of an asset is to move outside the highest and the lower strike price of the underlying asset. This case will allow investors to realize a maximum profit irrespective of the market showing a downtrend or an uptrend and makes up for the ideal time to implement the short call condor options trading strategy.

What is the impact of stock market price change on short call condor options trading strategy?

The best thing about a short-call condor options trading strategy is that it is not heavily impacted by the market trend. The only positive impact of the market price change happens if the price of an asset moves outside the highest and the lower strike price of the underlying asset. The only negative impact happens if the underlying asset’s price at the time of the expiry is between the two bought contracts’ strike price.

The short call condor options trading strategy is an effective strategy to trade options while mitigating the risk factor. It combines two tried and true options strategies of a Bear Call Spread and a Bull Call Spread to ensure low but risk-free and steady profits for the investors. However, a short-call condor options trading strategy is considered to be the most complex strategy, making it wise to consult a financial advisor such as IIFL before you implement the strategy.