Condors- Two Winged Creatures

A condor consists of an out-of-the-money credit spread in calls and an out-of-the-money credit spread in puts. Initially, you try to receive approximately the same credit for each side and create a balanced, or delta-neutral, position.

Traders who prefer to have time decay on their side are attracted to condors. Many condor traders have positions on continually, sometimes in more than one expiration month. Day by day, as the market chops its way sideways (which it does more than half the time), they watch their equity increase as the credit spreads decay. When the market moves, they adjust their positions to make them delta-neutral again.

Since a condor consists of credit spreads, its risk is absolutely limited. Even if the market opened with a gap up or down 1,000 points, you wouldn’t be ruined. And you’re always going to win on one side. To trade condors, you need an index or high-priced stock with high liquidity options and many strikes to work with. A lot of strikes are needed, at relatively small intervals, in order to give you the flexibility needed for putting credit spreads on just the right distance away from the money. Also, indices are preferred over individual stocks because indices don’t have anywhere near as much of a tendency to jump.

It is important to open the credit spreads far enough away from the money so that they have a decent probability of expiring worthless. The farther away from the money you can go, the greater the probability of the spreads expiring worthless without having to make any costly adjustments.

However, the farther away options have lower premiums. In fact, beyond a certain point, those premiums fall off rapidly. Thus you are sometimes pushed into using closer-to-the-money strikes than you really want to.

Note that condors are only practical if your commissions are very low. That is because you’ll be trading a lot of options, especially when you consider the occasional adjustments.

Condor traders are risk-averse traders. Besides having absolutely limited risk, a condor is also a very slow-acting position. Even a relatively big one-day market move affects the condor very little, because one wing of the condor benefits while the other is hurt. Be careful, though, if your position includes a close-to-the-money credit spread in the final days before expiration. If you are short a close-to-the-money option in the final week, you might want to consider closing that position early to avoid the possibility of being hurt by it.

So for the trader who enjoys actively managing a position in several options and seeing his account value grow almost daily, who doesn’t feel he can predict the direction of the market or doesn’t want to try, the limited-risk, slow-moving condor might be just the thing.

Happy Trading!!!

Cheers.