Condor Option Strategies

• stevenplace
• September 28th, 2008

Condor option spreads are some of the best ways to generate portfolio income and can lead to a significant increase in returns over a long period of time. This strategy is often overlooked by novice option players because it isn’t sexy and won’t double your money in 5 days. But it is a tried and true strategy and used by a lot of big players in the options market.

Condor spreads are simply the combination of two out of the money vertical spreads, one being a put vertical and one being a call vertical. Here’s an example of what the risk profile looks like. This is the analyze tab off thinkorswim’s trading platform.

There’s a couple things that you can see from this risk profile. First it’s positive theta. Since you are selling OTM verticals, the premium erodes over time. Second, the position is negative vega, which means that if volatility on the underlying goes up, extrinsic value (premium) expands and will make the verticals you sold worth more. However, over time, as long as you the price stays within that defined range, you will end up making money.

This strategy is risk-reward defined. You know exactly the most you are able to lose in a position, which is great for conservative investors. Notice that the closer you get to selling ITM (in-the-money) options, the higher your reward/risk ratio becomes. That is because the condor becomes narrower, leaving a greater probability for the price of the underlying to move out. As the condor widens, the reward diminishes, but you have a higher probability of receiving that premium.

When creating an iron condor position, it’s best to do so slowly. Legging into a spread can be advantageous, especially if you can time the market properly. If the underlying goes into an extremely oversold state, you can sell the call vertical first and then the put vertical when the stock moves more towards the mean.

Iron Condors are a kind of strategy that can be added upon itself as the underlying oscillates back and forth between overbought and oversold. This is known as a mean-reversion technique.

Here is an example of how this can work. This example was papertraded for about two weeks merely to provide an example and is not a trade recommendation.

Notice how there are different levels of profitability. This is due to the varying amounts of legs added in during different times. To learn more about condor execution techniques, click here.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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