Using the same option and stock prices we used for the long butterfly, we can examine a similar position known as a condor.
The Long Condor
The condor takes the body of the butterfly - two options at the middle strike - and splits it between two middle strikes rather than just one. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three.
Long 70 call, Short 75 call
Short 80 call, Long 85 call
You can also view a condor as a combination of a bull and bear call spread.
Long 70 call, short 75 call (bull call spread)
Short 80 call, long 85 call (bear call spread)
Imagine that a stock trading at $75 has been relatively flat for some time. If you think the situation is unlikely to change, you can sell one 75 call and one 80 call. At the same time, you'd buy one 70 call and one 85 call as a hedge in case the market moved against you. This combination of options creates the long condor. The position is considered "long" because it requires a net cash outlay to initiate.
|Sell 1 75 Call @ $6.00||($600.00)||(condor body)|
|Sell 1 80 Call @ $4.00||($720.00)||(condor body)|
|Buy 1 70 Call @ $9.00||$900.00||(wing)|
|Buy 1 85 Call @ $2.00||$200.00||(wing)|
|Cost of Trade||$100.00|
*Note: the same position can be established using puts. The profit/loss above does not factor in commissions, interest, or tax considerations.
In this case, the maximum profit is achieved at expiration with the stock between 75 and 80. At $75, the 75, 80, and 85 calls would expire worthless and the 70 calls would be worth $500. Thus, you would achieve your maximum profit of $400 ($500 - $100 initial debit). Between 75 and 80, the loss on the short 75 calls is more than offset by the 70 calls. Since the 80 and 85 calls would again expire worthless, the value at expiration is the same as the value of the 70/75 bull call spread ($5).
At any price above $85 or below $70, you would experience the maximum loss of $100.
If you like the idea behind the condor, be sure to check out long butterflies and short butterflies. These can be comparable strategies depending on your objectives.