A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two middle sold options have different strikes. The profitable area of the pay off profile is wider than that of the Long Butterfly (see pay-off diagram).

The strategy is suitable in a range bound market. The Long Call Condor involves buying 1 ITM Call (lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call (higher middle) and buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that the risk is capped on both the sides. The resulting position is profitable if the stock / index remains range bound and shows very little volatility. The maximum profits occur if the stock finishes between the middle strike prices at expiration. Let us understand this with an example.

When to Use: When an investor believes that the underlying market will trade in a range with low volatility until the options expire.

Risk Limited to the minimum of the difference between the lower strike call spread less the higher call spread less the total premium paid for the condor.

Reward Limited. The maximum profit of a long condor will be realized when the stock is trading between the two middle strike prices.

Break Even Point: Upper Breakeven Point = Highest Strike – Net Debit Lower Breakeven Point = Lowest Strike + Net Debit

Example: Nifty is at 3600. Mr. XYZ expects little volatility in the Nifty and expects the market to remain rangebound. Mr. XYZ buys 1 ITM Nifty Call Options with a strike price of Rs. 3400 at a premium of Rs. 41.25, sells 1 ITM Nifty Call Option with a strike price of Rs. 3500 at a premium of Rs. 26, sells 1 OTM Nifty Call Option with a strike price of Rs. 3700 at a premium of Rs. 9.80 and buys 1 OTM Nifty Call Option with a strike price of Rs. 3800 at a premium of Rs. 6.00. The Net debit is Rs. 11.45 which is also the maximum possible loss.

Example :

Suppose Nifty is at 3600 in June. An investor enters a condor trade by buying a Rs. 3400 strike price call at a premium of Rs. 41.25, sells a Rs. 3500 strike price call at a premium of Rs. 26. sells another call at a strike price of Rs. 3700 at a premium of Rs. 9.80 and buys a call at a strike price of Rs. 3800 at a premium of Rs. 6. The net debit from the trades is Rs. 11.45. This is also his maximum loss.

To further see why Rs. 11.45 is his maximum possible loss, lets examine what happens when Nifty falls to 3200 or rises to 3800 on expiration.

At 3200, all the options expire worthless, so the initial debit taken of Rs. 11.45 is the investors maximum loss.

At 3800, the long Rs. 3400 call earns Rs. 358.75 (Rs. 3800 – Rs. 3400 – Rs. 41.25). The two calls sold result in a loss of Rs. 364.20 (The call with strike price of Rs. 3500 makes a loss of Rs. 274 and the call with strike price of Rs. 3700 makes a loss of Rs. 90.20). Finally, the call purchased with a strike price of Rs. 3800 expires worthless resulting in a loss of Rs. 6 (the premium). Total loss (Rs. 358.75 – Rs. 364.20 – Rs. 6) works out to Rs. 11.45. Thus, the long condor trader still suffers the maximum loss that is equal to the initial debit taken when entering the trade.

If instead on expiration of the contracts, Nifty is still at 3600, the Rs. 3400 strike price call purchased and Rs. 3700 strike price call sold earns money while the Rs. 3500 strike price call sold and Rs. 3800 strike price call sold end in losses.

The Rs. 3400 strike price call purchased earns Rs. 158.75 (Rs. 200 – Rs. 41.25). The Rs. 3700 strike price call sold earns the premium of Rs. 9.80 since it expires worthless and does not get exercised. The Rs. 3500 strike price call sold ends up with a loss of Rs. 74 as the call gets exercised and the Rs. 3800 strike price call purchased will expire worthless resulting in a loss of Rs. 6.00 (the premium). The total gain comes to Rs. 88.55 which is also the maximum gain the investor can make with this strategy.

The maximum profit for the condor trade may be low in relation to other trading strategies but it has a comparatively wider profit zone. In this example, maximum profit is achieved if the underlying stock price at expiration is anywhere between Rs. 3500 and Rs. 3700.