Call Broken Wing Condor Spread

Call Broken Wing Condor Spread Risk Graph
Learn How To Read This Chart


Call Broken Wing Condor Spread - Introduction


The Call Broken Wing Condor Spread, also known as the Broken Wing Call Condor Spread or Skip Strike Condor Spread, is a variant of the Condor Spread options trading strategy. Similar to the Condor Spread, it is a neutral options strategy but unlike the Condor Spread, it transfers all the risk of loss when the stock breaks downwards onto the upwards side. This means that the Call Broken Wing Condor Spread does not lose money when the stock ditches downwards but will lose more money than a regular Condor Spread if the stock rallies. This is particularly useful when the stock is expected to either stay stagnant or break downwards.

Yes, Broken Wing Condor Spreads are Condor Spreads that transfer the risk of loss on one leg onto the other. This creates an assymetric risk graph that favors the stock moving in a certain direction. The Call Broken Wing Condor Spread protects against the stock breaking downwards while the Put Broken Wing Condor Spread protects against the stock breaking upwards. Learn about Broken Wing Condor Spreads first.

Find Options Strategies With Similar Risk Profiles Find Options Strategies With Similar Risk Profiles



Call Broken Wing Condor Spread - Classification



Strategy : Neutral | Outlook : Loose Neutral | Spread : Vertical Spread | Debit or Credit : Credit



Main Difference Between Call Broken Wing Condor Spread and Condor Spread


The main difference between the call broken wing Condor Spread and the Condor Spread is that the call broken wing Condor Spread transfers the potential downside losses onto the upside. The Call Broken Wing Condor Spread achieves this simply by buying further out of the money call options instead of call options at the same distance from the short option strike price as the in the money call options.

In a regular Condor Spread options trading strategy, both in the money options and out of the money options are bought at an equidistance from the short options strike prices. This creates a symmetrical risk graph with equal risk of loss on both upside and downside as you can see in the risk graph below:

Long Condor Spread Risk Graph



By moving the out of the money call options further away from the short strike price than the in the money call options, the Broken Wing Condor Spread reduces the debit of the position to the extend that the position is either a zero cost position or a credit spread. The result of such an adjustment is that if the stock goes downwards, the position gains the net credit if it is a credit spread or simply makes no loss if the position is a zero cost one.


Example : Assuming QQQQ trading at $43.57.

Regular Condor Spread

Buy To Open 1 contract of Jan $42 Call at $2.38
Sell To Open 1 contract of Jan $43 Call at $1.63
Sell To Open 1 contract of Jan $44 Call at $1.03
Buy To Open 1 contract of Jan $45 Call at $0.60

Net Debit = (($2.38 + $0.60) - ($1.63 + $1.03)) x 100 = $32.00 per position

Call Broken Wing Condor Spread

Buy To Open 1 contract of Jan $42 Call at $2.38
Sell To Open 1 contract of Jan $43 Call at $1.63
Sell To Open 1 contract of Jan $44 Call at $1.03
Buy To Open 1 contract of Jan $46 Call at $0.20

Net Credit = (($2.38 + $0.20) - ($1.63 + $1.03)) x 100 = $8.00 per position

The Call Broken Wing Condor Spread options trading strategy is so named because one "wing" is shorter than the other. Risk can also be transferred to upside so that when the stock rallies, the position makes no loss through using a Put Broken Wing Condor Spread. Both Call Broken Wing Condor Spread and Put Broken Wing Condor Spreads are variants of the Condor Spread which options traders can use to better tailor the position to a multi-directional expectation.


When To Use Call Broken Wing Condor Spread?


One should use a Call Broken Wing Condor Spread when one expects the price of the underlying asset to move within a tight channel over the life of the option contracts and speculates that even if the underlying asset should stage a breakout, the breakout will most likely be downwards.



How To Use Call Broken Wing Condor Spread?


A call broken wing condor spread is actually made up of two different spreads. An In The Money Bull Call Spread and an Out of the money Bear Call Spread. There are 4 trades to make: Sell To Open In The Money call options + Buy to Open Deeper in the money call options (ITM Bull call spread) + Sell to Open Out of the Money call options + Buy to open further out of the money call options with strike difference greater than in the ITM bull call spread (OTM Bear Call Spread).

Buy Further ITM Call + Sell ITM Call + Sell OTM Call + Buy Even Further OTM Call



The profitable range of the call broken Wing condor spread is largely determined by the difference in strike between the two short call options. The wider the strike difference, the lower the maximum profit becomes but the larger the profitable price range which increases the probability of making a profit. So, its a trade off between the probability of profiting and the amount of potential profit. This is the kind of trade off that you will see in options trading all the time.

As the out of the money call option determines the point beyond which the position will stop making a loss when the stock rallies, buying a further out of the money call option means a higher maximum potential loss than a regular condor spread that would have bought the out of the money call option at the same strike difference as the in the money wing.

Call Broken Wing Condor Spread

Buy To Open 1 contract of Jan $42 Call at $2.38
Sell To Open 1 contract of Jan $43 Call at $1.63
Sell To Open 1 contract of Jan $44 Call at $1.03
Buy To Open 1 contract of Jan $46 Call at $0.20

Net Credit = (($2.38 + $0.20) - ($1.63 + $1.03)) x 100 = $8.00 per position

The profitability of a call broken wing condor spread can be enhanced or better guaranteed by legging into the position properly.



Profit Potential of Call Broken Wing Condor Spread :


Call Broken Wing Butterfly spreads achieve their maximum profit potential at expiration if the price of the underlying asset is equal to the middle strike price.

From the above example : As long as QQQQ closes between $43 and $44, the maximum profit can be attained.



Trading Level Required For Call Broken Wing Condor Spread


A Level 4 options trading account that allows the execution of credit spreads is needed for the Call Broken Wing Condor Spread. Read more about Options Account Trading Levels.



Profit Calculation of Call Broken Wing Condor Spread:


Maximum Profit = [(Difference between two lowest strikes) + Net Credit] x 100

Maximum Loss = ((highest strike - skipped strike) - net credit) x 100

From the above example :

Maximum Profit = [(43 - 42) + 0.08] x 100 = 1.08 x 100 = $108 per position

Maximum Loss = ((46 - 45) - 0.08) x 100 = 0.92 x 100 = $92 per position




Risk / Reward of Call Broken Wing Condor Spread:



Upside Maximum Profit: Limited

Maximum Loss: Limited



Losing Point (Break even point) of Call Broken Wing Condor Spread:


A Call Broken Wing Condor Spread makes a loss only when the stock rallies above the losing point.

Losing point = skipped strike + net credit

From the above example :

Losing Point = $45 + $0.08 = $45.08.




Advantages Of Call Broken Wing Condor Spread:



:: Transfer downside risk totally into the upside leg.

:: Higher maximum profit than a regular Condor Spread.



Disadvantages Of Call Broken Wing Condor Spread:



:: Higher margin requirement than a regular Condor Spread.

:: Higher maximum loss than a regular Condor Spread.



Alternate Actions for Call Broken Wing Condor Spreads Before Expiration :



1. If the underlying asset has gained in price and is expected to continue rising, you could buy back the short call options and hold the long call options.


Recommended!Trade Call Broken Wing Condor Spreads With Best Options Broker, OptionsXpress!




cool feature! Don't Know If This Is The Right Option Strategy For You? Try our Option Strategy Selector!


Javascript Tree Menu

Please LIKE Us

:


Follow Our Updates:

Keep in touch with our updates through RSS...NOW! Follow Optiontradingpedia.com on Twitter