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The
Condor Option Spread
Outlook:
Low Stock Volatility
The Condor Option Spread is to be used when you think a stock will
not go up or down very much, which means it is not very
volatile. To open a condor option spread you have to make four
trades: You sell a call with a strike price higher than the
current market price, and buy a call with a strike price even higher
than the call you sold. You also sell a put with a strike
price lower than the current market price, and buy a put with a
strike price even lower. You then hope that the stock will
fall between the call and put you sold at the date of expiration,
which means all of the options you traded will expire worthless.
Example:
The DIA trades at 100.00. You think it won't go up or down
over the next month, so you setup a condor.
Sell a call with a strike $103, taking in $180
Buy a call with a strike $105, spending $60
Sell a put with a strike $98, taking in $150
Buy a put with a strike $96, spending $50
Your
net initial cash flow is $220 (excluding commissions), so if the stock closes between $98 and $103
on expiration, all of the options expire worthless and you make a
profit of $220.
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