Long Condor Spreads: Understanding the Basics

Key Points

  • A long condor spread is a neutral strategy that can be used when the underlying stock or ETF is trading in a narrow range and you expect little movement in the underlying.
  • It includes four different strike prices with the same expiration month and the following format: buy one option (at the lowest strike price), sell one option (at the next higher strike price), sell one option (at the next higher strike price) and buy one option (at the highest strike price).
  • Long condors differ from long butterflies in that you can achieve maximum profitability over a range of prices, rather than a single price point. The trade-off is a lower potential reward.
  • We explore how to create and how to give a bullish or bearish tilt to long condors.

A long condor is the most common of the four-legged option strategies. It is a mostly neutral strategy that can be used when the underlying stock or ETF is trading in a narrow range.

A condor spread is always established with the exact same quantity of contracts on all four legs and it can be composed of either calls or puts.

Typically, the underlying stock will be halfway between the two middle strike prices when you set up the strategy. To visualize it, think of it as a butterfly that has been extended with four strike prices.

How does it differ from a butterfly?

A condor is often compared to the more well-known three-legged butterfly strategy. Like the butterfly, its maximum gain, maximum loss, and breakeven points are all known at the point of order entry. However the condor differs from the butterfly's single price point for maximum gain as its structure allows for a maximum gain to occur over a range of prices.

With this structure, it essentially allows more room for error when trying to achieve maximum profitability. The give-up, however, is that the maximum gain potential is less, and the maximum loss potential is greater than a similarly structured butterfly.

While still less popular than the butterfly, retail interest for this strategy has grown as option commissions have declined. With the introduction of multi-leg option order entry screens, at Schwab you actually get a discount on commissions when you enter multi-legged strategies such as spreads, straddles, butterflies, condors, etc. as a single order, rather than as multiple smaller orders.

When to enter a trade

The ideal time to enter a condor spread is when you expect little movement in the underlying instrument (stock or ETF) and it’s trading between the two middle strike prices. When you believe a stock will remain very stable, a butterfly may be your best strategy, but when you are more uncertain, the condor is probably a better choice.

Let’s take a look at a sample condor trade.

Purpose: Limited risk with limited profit potential

Long condor spread:
Buy to open 10 XYZ Feb 55 Calls @ 6.00A    
Sell to open 10 XYZ Feb 60 Calls @ 1.50B
Sell to open 10 XYZ Feb 65 Calls @ .50B
Buy to open 10 XYZ Feb 70 Calls @ .10A    

When you initiate an order like this, using the All in One trade ticket (inspired by optionsXpress), StreetSmart Edge®  will automatically calculate the market price of this 10/10/10/10 spread. To manually calculate it, reduce the spread by its greatest common factor of 10 to 1/1/1/1 and then multiply each leg by the market price, using the ask price on the legs you are buying, and the bid price on the legs you are selling:

1 X -6A        =     -6.00
1 X +1.50B   =   +1.50
1 X +.50B    =      +.50
1 X -.10A     =      -.10
Net               =    -4.10 x 10 spreads = ($4,100) total up front cost

The condor spread's market price is a debit of 4.10, and its total cost would be 4.10 x the number of 1/1/1/1 spreads (10) x the option multiplier (100) = ($4,100). 

The chart below depicts the profit/loss zones of this example, including the breakeven points, at the option expiration date.

Profit and loss at expiration

Profit and loss at expiration

Source: Schwab Center for Financial Research

The maximum profit on this strategy, which occurs at all prices from 60 to 65, is $900. The two  breakeven points occur at 59.10 and 65.90 while all prices below 59.10 or above 65.90 result in a loss. The maximum loss to the upside or downside is -$4,100, which occurs at or below 55 and at or above 70.

To illustrate how these profit and loss zones are calculated, see below for some sample prices at expiration.

A look at different expiration price scenarios

XYZ at 55 or below at expiration:            
Initial cost:                                                           ($4,100)
All options expire worthless:
Net loss of 4.10 x 10 spreads:                         = ($4,100)

XYZ at 59.10 at expiration:
Initial cost:                                                              ($4,100)
Exercise 10, 55 calls and acquire 1,000 shares:   ($55,000)
1,000 shares sold at market:                                 $59,100
60, 65 and 70 calls expire worthless:
Net profit/loss:                                                          = $0

XYZ at 60 at expiration:                           
Initial cost:                                                              ($4,100)
Exercise 10, 55 calls and acquire 1,000 shares:   ($55,000)
1,000 shares sold at market:                                 $60,000
60, 65 and 70 calls expire worthless:
Net profit:                                                               = $900

XYZ at 65 at expiration:                               
Initial cost:                                                              ($4,100)
Exercise 10, 55 calls and acquire 1,000 shares:   ($55,000)
Called away on 1,000 shares at 60:                       $60,000
65 and 70 calls expire worthless:
Net profit:                                                               = $900

XYZ at 65.90 at expiration:          
Initial cost:                                                              ($4,100)
Exercise 10, 55 calls and acquire 1,000 shares:   ($55,000)
Called away on 1,000 shares at 60:                      $60,000
Called away on 1,000 shares at 65:                      $65,000
1,000 short shares bought back at market:          ($65,900)
70 calls expire worthless:
Net profit/loss:                                                          = $0

XYZ at 70.00 or above at expiration:           
Initial cost:                                                              ($4,100)
Exercise 10, 55 calls and acquire 1,000 shares:   ($55,000)
Called away on 1,000 shares at 60:                      $60,000
Called away on 1,000 shares at 65:                      $65,000
Exercise 10, 70 calls and acquire 1,000 shares:   ($70,000)
Net loss:                                                             = ($4,100)

How to choose a strike price

A long condor spread can be created using either calls or puts with very similar general characteristics. While a long condor is generally a neutral strategy, you can put a very slight bullish or bearish bias on it, depending upon whether you use above the money (ABTM), around the money (RTM) or below the money (BTM) calls or puts.

This table may help you make strike price choices.

Considerations for selecting strike prices

Considerations for selecting strike prices

Source: Schwab Center for Financial Research

Bottom line

The long condor strategy, which provides an opportunity to profit on a stock that remains relatively neutral, is one of the unique benefits of trading options, and something that simply can’t be done by trading stocks alone.

I hope this enhanced your understanding of trading options. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts. (If you are logged into Schwab.com, you can include comments in the Editor’s Feedback box.)

Next Steps

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