Condor Spread

A condor spread is an options strategy that uses four strike prices on the same underlying asset and expiry. In the long form, the trader buys one option at the lowest strike, sells one at each of the two middle strikes, and buys one at the highest strike. The position earns its maximum profit if the underlying finishes anywhere between the two middle strikes, and its loss is limited to the premium paid.

A condor is closely related to the butterfly spread. A butterfly sells two options at a single middle strike and so has a profit peak at one price. A condor separates those two short options, replacing the peak with a flat plateau. The trader accepts a lower maximum profit in return for a wider range of prices at which it is earned. The name refers to the broad wingspan of the payoff diagram.

A long call condor has four legs with strikes $K_1$, $K_2$, $K_3$ and $K_4$ in rising order: a long call option at $K_1$, short calls at $K_2$ and $K_3$, and a long call at $K_4$. The distance from $K_1$ to $K_2$ normally equals the distance from $K_3$ to $K_4$. The position can be read as a bull call spread on the lower two strikes combined with a bear call spread on the upper two.

The same payoff can be built from four puts. Both the call and put versions are opened for a net debit and are classed as a type of option spread with defined risk.

For a long condor with equal wing widths:

• $K_1$ to $K_4$ are the four strike prices, lowest to highest.
• Net premium paid is the cost of the two options bought minus the amount received for the two sold.

A share trades at $100. A trader buys the $90 call for $11.00, sells the $95 call for $7.00, sells the $105 call for $2.00 and buys the $110 call for $0.90. The net premium is 11.00 + 0.90 − 7.00 − 2.00 = $2.90. The maximum profit is (95 − 90) − 2.90 = $2.10, earned if the share finishes anywhere from $95 to $105. The maximum loss is $2.90, incurred at or below $90 or at or above $110. The break-even prices are 90 + 2.90 = $92.90 and 110 − 2.90 = $107.10.

If the share finishes at $93, the $90 call is worth $3 and the rest expire worthless, giving a profit of 3 − 2.90 = $0.10.

• Iron condor. The most widely traded form mixes puts and calls. The trader sells an out-of-the-money put and an out-of-the-money call and buys a further out-of-the-money put and call as protection. It is opened for a net credit, and its payoff has the same shape as the long condor. See iron condor.
• Short condor. The reverse of the long condor: the trader sells the outer strikes and buys the inner ones, profiting if the price moves beyond either wing.
• Unbalanced condors. The wings are given different widths, or the body is placed off-center, to lean the position toward a rise or a fall.

A condor without its protective wings is a short strangle, which collects more premium but has unlimited risk.

A condor centered on the current price has little directional exposure at the start. It gains from the passing of time, measured by theta, as long as the price remains inside the body. It has negative vega, so a rise in implied volatility reduces its value, and negative gamma, so large price moves hurt. These exposures are those of a seller of volatility. The position profits when realized volatility turns out lower than the level implied by option prices when the trade was opened.

Compared with a butterfly on the same underlying, a condor has a higher chance of some profit and a smaller payoff relative to its cost. The probability of profit can be estimated from option prices, but a high probability goes together with a loss that is larger than the gain when it does occur.

In the example, the trader risks $2.90 to make $2.10. A single losing trade cancels more than one winning trade, so the strategy depends on the price staying in range more often than option prices imply. Long quiet periods can produce a run of small gains that is then undone by one sharp move.

Four legs mean four sets of commissions and bid-ask spreads, which matter for a position with a modest maximum gain. With American-style options, either short option may be assigned early. If the price is close to one of the short strikes at option expiry, the trader may not know until afterward whether assignment occurred and can be left with an unhedged share position. Many traders close condors before the final days for this reason, giving up the last part of the possible profit.