The Condor is a neutral strategy in which you use all Calls or all Puts at different Strikes but all have the same Expiration Dates. Similar to Butterfly strategy, Condor also allows further Cost Basis Reduction. When you combine a Bear Call and a Bull Put Spread together in a single Spread, it is called an Iron Condor.
The Expiration months and increments between the Strike Prices for all options should be the same for a Condor. So if you are doing an Iron Condor with Short Call and Short Put Spreads, the distance between the Strike Prices for the Calls and Puts should be the same, and so should be the Expiration months.
• Sell At The Money (ATM) Call Option and Sell ATM Put Option.
• Buy one Out of The Money (OTM) Call Option and one OTM put to hedge yourself if the Stock moves erratically to the Upside or Downside.
• Use the same underlying asset and the same contract Expiration Date based on Analytics accuracy.
• Select Strike Prices based on Probability of Success and Tradespoon Analytics, and also review the Implied Volatility Rank.
Let’s go through a specific example for which the Profit/ Loss Chart is given below. As you can see the Expiration Month is the same for all-October. Maximum loss will occur if the stock makes a rapid movement to the Downside and drops below 31, or make a rapid movement to the Up- side and goes above 47.
Max Gain will happen in between these two Short Strike Prices, which is from 32 to 46. Break Even Point is Credit you have received for the Spread and is the point where the x-axis intercepts the Profit/Loss graph. Also keep in mind that this is a market neutral strategy and since you are doing 2 Credit Spreads, you will benefit from an increase in Implied Volatility.
Preparing a Condor: Conditions and strategy
• The market outlook is sideways to neutral.
• Risk is limited by the Option you purchase.
• Reward is also limited.
• To be profitable the Stock must close between the Short Strikes Prices at Expiration. But since you are selling the Credit, you need to do it when the Implied Volatility is elevated.
• Typically you will have lower profits and higher probabilities because you are collecting Credits on both sides of Call Spread and Put Spread.
• It is a Credit Strategy where you receiving the premium.
• You should review the Implied Volatility Rank.
• Use Tradespoon Stock Forecast tool to find optimal middle Strike Prices and to where the Stock is gravitating towards.