In a previous section, we described the Butterfly strategy of options trading as an extension of the concept of using option spreads. We discussed how Butterflies can be used to take advantage of either low volatility or high volatility situations.
There is a similar option strategy called a Condor, which uses the same general concept as a Butterfly, but has what might be considered a 'wider body'. There's also the idea of an Iron Condor, a further extension of the concept that is created using a mix of calls and puts.
A Condor is set up much like a Butterfly, but an additional strike price is used. In the Butterfly, there are two options set at a particular strike price. Simultaneously, the opposite position is taken at a both a higher strike price and a lower strike price.
A Long Condor features the same concept as the Long Butterfly, except it has a wider, flatter range. Instead of a sharp peak, it has a wide plateau within which the trader hopes to profit.
A Condor combines 4 call options -- selling a call at two inner option strikes and buying a call at two outer option strikes, which are equidistant from their corresponding inner strikes.
As long as the price of the stock stays between the two inner strikes, the trader would profit at the maximum profit, which is equal to the distance between the long strike and the short strike.
The Short Condor has the same makeup as a Long Condor, except the trader would sell the outer strikes and buy the inner strikes.
To profit from a long condor, there would need to be significant volatility for the stock price to move outside the range of the 'body'.
Take a look at the following graphs for the Condor strategy. They're taken from a recent expiration for SPY. The stock price is $210.00. To the downside, we choose an inner strike of 205 with a price of $7.25, and an outer strike of 200 with a price of $11.50. To the upside, we choose an inner strike of 215 and a price of $1.25, and an outer strike of 220 with price of $0.75.
For the Long Condor, we would sell the inner strikes and buy the outer strikes.
For the Short Condor, we would sell the outer strikes and buy the inner strikes.
An Iron Condor is constructed using a combination of calls and puts, as opposed to the standard Condor above, which uses only calls.
A purchase a Long Iron Condor, a trader would sell an out-of-the-money put and buy another put at a lower strike, deeper out-of-the-money. The trader would also sell an out-of-the-money call and buy a different, deeper out-of-the-money call at a higher strike.