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Long Condor Spreads: Finding Good Candidates

Long Condor Spreads: Finding Good Candidates

Key Points
  • Long condor spreads are a neutral strategy mostly used when you expect the underlying stock (or ETF) to remain in a narrow range.

  • A key benefit of a condor spread over a butterfly spread is that it can have a wider price range at expiration to achieve profitability. 

  • When selecting long condor spread candidates, consider securities with a price level that is typically over $50 per share.

  • We review how to set up a long condor spread.

A long condor spread is a neutral, four-legged option strategy. It is generally used when you expect the underlying security to trade in a narrow range over the life of the options.

The condor spread strategy includes the same quantity of contracts, and they must all have the same expiration dates on all four legs; it can be created with either calls or puts. When building the strategy, the underlying stock is usually halfway between the two middle strike prices.

A condor is essentially a butterfly spread that has been extended over four strike prices, instead of three. As a result, condors have a wider price range to achieve profitability than butterflies.

Furthermore, while good butterfly candidates can often be found in any price range, it’s more likely that you’ll find good condor candidates, due to their wider price zone, by limiting your selections mostly to stocks trading over $50 per share.

You can usually find condor candidates by looking for stocks or ETFs that have these qualities:

  • Range bound: They have been in a 10 - 20 point channel (trading range) for about six to eight weeks or more.
  • Trading in the middle of the range: They have recently been trading in about the middle of that channel.
  • Trading near the midpoint between two standard option strike prices: They are trading at a price over $50 per share, near the midpoint between two standard option strike prices, such as 55, 60, 65, 75, 80, 90, etc.
  • No news: They are not expected to be in the news (e.g., an earnings report), which might cause the security to move out of that channel, or cause a sharp increase in volatility.

While these criteria might sound overly restrictive, you’ll be surprised how many candidates you’ll find through a little research. Then, it is often helpful to draw the important price levels on a price chart, such as those available in StreetSmart Edge®. This will help you visualize stock price movements that may result in a profitable or unprofitable strategy.

How to calculate price levels

First, let’s learn how to calculate the key price levels on a sample 10-point condor so we’ll know where to draw the lines. Assuming stock XYZ is trading at $184.30, the following formulas will allow you to calculate the maximum gain, maximum loss, and upper and lower breakeven prices on any long condor trade.

Example of a 10-point condor spread:

Buy 10 XYZ Oct 170 calls @ 16.60
Sell 10 XYZ Oct 180 calls @ 8.60
Sell 10 XYZ Oct 190 calls @ 3.55
Buy 10 XYZ Oct 200 calls @ 1.17
Debit = 5.62 (-16.60 + 8.60 + 3.55 – 1.17)
Maximum gain = 4.38 (second strike – first strike - debit) (occurs between second and third strike) or $4,380
Maximum loss = 5.62 (debit paid) (occurs at outside strike prices) or $5,620
Upper breakeven = $194.38 (third strike + maximum gain) 
Lower breakeven = $175.62 (second strike – maximum gain) 
Total cost of this trade = $5,620 (debit x number of spreads x option multiplier) or (5.62 x 10 x 100)

Or, you can use StreetSmart Edge to do it for you as shown below.

Calculating maximum gain, maximum loss and breakeven for a long condor trade

Calculating maximum gain, maximum loss and breakeven for a long condor trade

Source: StreetSmart Edge.

Creating charts

To create charts, you’ll want to include lines that represent the outside strike prices of $170 and $200 (maximum loss levels) and the upper and lower breakeven levels of $194.38 and $175.62. A convenient way to do this is to use the support and resistance lines, which are typically used for technical analysis, to illustrate the breakeven and maximum loss levels. Use the support line tool (red line) for the outer maximum loss lines, and the resistance line tool (green line) for the breakeven thresholds as illustrated below.

Breakeven thresholds 

Breakeven thresholds

Source: StreetSmart Edge.

This chart was taken around August 7, 2014 with the October condor having about 72 days until expiration. It illustrates that if XYZ is between $175.62 and $194.38 at the October option expiration, this trade will be profitable. The maximum profit of $4,380 will be reached if XYZ is anywhere between $180 and $190 (the inner strike prices) at expiration.

However, you’ll incur losses if XYZ closes above $194.38 at expiration, with a maximum $5,620 loss occurring at any price above $200. This will also happen if XYZ closes below $175.62 at expiration, with a $5,620 maximum loss coming at any price below $170.

Unlike butterfly spreads, which are very difficult to hit maximum profit, condor spreads more frequently hit it because it occurs over a range of prices, rather than a single price. In this example, the profit zone is 18.76 points ($194.38 - $175.62) with a maximum profit zone of 10 points ($190 – $180), allowing plenty of room for normal market fluctuation, increasing the chances of finishing profitable if the stock remains relatively stable.

If the trade is profitable, the rate of return can be calculated by dividing the amount of the eventual gain ($0 up to $5,620) by the amount invested ($4,380). Thus, your rate of return will be somewhere between 0% and 128%. If the traded is unprofitable, the loss will range from 0% to 100%.

Condor candidates with other profit and loss features

Let’s do one more example to illustrate a 2.5-point condor candidate with different profit and loss characteristics. Assume stock ZYX is trading at $85.51.

ZYX has the following characteristics:

  • Range bound: It has been in a 7.5-point channel between $82.50 and $90 for about nine weeks.
  • Trading in the middle of the range: It is trading around the middle of that channel ($83.51) and with a price near the midpoint between two standard option strike prices of $85 and $87.50
  • No news: There’s no expected news or impending events (e.g., an earnings report), which might cause the security to move out of that channel, or cause a sharp increase in volatility.

Example for a 2.5-point condor spread:

Buy 10 ZYX Oct 82.50 calls @ 4.85
Sell 10 ZYX Oct 85.00 calls @ 3.10
Sell 10 ZYX Oct 87.50 calls @ 1.92
Buy 10 ZYX Oct 90.00 calls @ 1.13
Debit = .96 (-4.85 + 3.10 + 1.92 – 1.13)
Maximum gain = 1.54 (second strike – first strike - debit) (occurs between second and third strike) or $1,540
Maximum loss = .96 (debit paid) (occurs at outside strike prices) or $960
Upper breakeven = $89.04 (third strike + maximum gain) 
Lower breakeven = $83.46 (second strike – maximum gain) 
Total cost of this trade = $960 (debit x number of spreads x option multiplier) or (.96 x 10 x 100)

Again, these formulas will allow you to calculate the maximum gain, maximum loss, and upper and lower breakeven on any long condor trade, or you can use StreetSmart Edge to do it for you as shown below.

How to calculate maximum gain, maximum loss and breakeven in StreetSmart Edge

How to calculate maximum gain, maximum loss and breakeven in StreetSmart Edge

Source: StreetSmart Edge.

Once you have these important values, consider drawing them on the actual price chart to help determine whether the trade is realistic or not.

The lines you’ll want to show on the chart are the outside strike prices of $82.50 and $90 (represented by the red lines) and the upper and lower breakeven levels of $89.04 and $83.46 (represented by the green lines). As in the previous example, I’ve used the support and resistance line tools to mark up the following chart.

Price chart

Price chart

Source StreetSmart Edge.

This chart was taken around August 7, 2014 as the October condor had about 72 days until expiration. If ZYX is between $83.46 and $89.04 at the October option expiration, this trade will be profitable. The maximum profit will be reached if ZYX is anywhere between $85 and $87.50 (the inner strike prices) at expiration.

You’ll incur losses if ZYX closes above $89.04 at expiration, with the maximum $960 loss occurring at any price above $90. Likewise, losses will be incurred if XYZ closes below $83.46 at expiration, with the maximum $960 loss also occurring at any price below $82.50.

Again, since the profit zone on condor spreads occurs over a much wider range of prices than on a butterfly spread, this strategy has a higher probability of being profitable. In this example, the profit zone is 5.58 points ($89.04 – $83.46), and the maximum profit zone is 2.5 points ($87.50 – $85), allowing plenty of room for normal market fluctuation. This trade could finish profitable if the stock remains relatively stable until the options expire.

If the trade finishes profitable, the rate of return can be calculated by dividing the amount of the eventual gain ($0 up to $1,540) by the amount invested ($960). Thus, your rate of return will be somewhere between 0% and 160%. If the traded is unprofitable, the loss will range from 0% to 100%. 

As discussed, with only a little effort, you will probably be very surprised at how many condor spread candidates you may find on stocks trading over $50 per share.

I hope this enhanced your understanding of long condor candidates. 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.)

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Important Disclosures

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options before considering any option transaction.

Multiple-leg options strategies will involve multiple commissions. For the sake of simplicity, the examples in this presentation do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of strategies displayed. Please contact a tax advisor for the tax implications involved in these strategies.

Spread trading must be done in a margin account.

Supporting documentation for any claims or statistical information is available upon request.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab's StreetSmart Edge and StreetSmart.com are available for qualified Schwab Trading clients only.

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