Long Albatross Spread

Long Albatross Spread Risk Graph
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Albatross Spread - Introduction



The Albatross Spread is an advanced neutral option trading strategy which profits from stocks that are stagnant or trading within a pre-determined price range (Range Bound).

In fact, the long albatross spread is simply a long condor spread with extremely "long wings" created by writing the short legs at a much wider strike difference. The long albatross spread covers the widest range of strike prices compared with its condor spread and butterfly spread cousin. Interestingly, these complex neutral options trading strategies are named by the length of their "wings", with the butterfly spread covering the smallest strike difference and the albatross spread covering the widest spread difference.

As the Albatross Spread is simply a Condor Spread with much wider strike difference, it is simply known as the Condor Spread or Wide Condor Spread in most options trading literatures.

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Albatross Spread - Classification



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


When To Use Albatross Spread?


One should use a Albatross Spread when one expects the price of the underlying asset to trade within a pre-determined, fairly wide, price range over the life of the options contracts involved.



How To Use Albatross Spread?


There are two ways to establish a Albatross Spread. One way is to use only call options. We call this a "Call Albatross Spread". The other way is to use only put options. We call that a "Put Albatross Spread". Both Call and Put Albatross Spreads are neutral options strategies and are profitable as long as the underlying stock remains within the price range bounded by the short strike prices.

Either way, the composition of the Albatross Spread is the same. It involves buying to open 1 far In The Money (ITM) option, selling to open 1 In The Money option, selling to open 1 Out of The Money (OTM) option and buying to open 1 further Out of The Money (OTM) option.

(a)Buy One Far ITM + (b)Sell One ITM + (c)Sell One OTM + (d)Buy One Far OTM




Trading Level Required For Albatross Spread


A Level 3 options trading account that allows the execution of debit spreads is needed for the Albatross Spread. Read more about Options Account Trading Levels.



Establishing Call Albatross Spread


Establishing a Call Albatross Spread involves buying to open 1 ITM call option, selling to open 1 ATM call option, selling to open 1 OTM call option and then finally buying to open a further OTM call option.

The choice of which strike prices to buy the long leg (trades a and d above) at depends on the range within which the underlying asset is expected to trade in. The further away from the money the 2 long legs are, the lower the risk (as the underlying stock needs to move further in order to exit the breakeven range) and the more expensive the Long Albatross spread becomes due to the higher premium of deeper in the money options.

Furthermore, the choice of which strike prices to buy the two short legs (trades b and c above) at depends on how wide you want the range within which the maximum profit will occur. The further from each other the two short legs are, the wider the price range will be where you will get the maximum profit potential of the Albatross Spread at the cost of a lower maximum profit.

Example : Assuming QQQQ trading at $43.57.

Buy To Open 1 contract of Jan $41 Call at $3.35
Sell To Open 1 contract of Jan $42 Call at $2.38
Sell To Open 1 contract of Jan $45 Call at $0.60
Buy To Open 1 contract of Jan $46 Call at $0.10

Net Debit = ($3.35 - $2.38 - $0.60 + $0.10) x 100 = $47.00 per position


In the above example, we are expecting the QQQQ to trade within a price range of between $41 to $46 upon expiration and achieving the maximum profit potential of the Albatross Spread when QQQQ is within $42 to $45. See how much wider the ranges are compared with the Butterfly Spread and the Condor Spread?



Establishing Put Albatross Spread


Establishing a Put Albatross Spread is exactly the same as establishing a Call Albatross Spread except that put options are used instead. Due to differences in extrinsic value between call options and put options across the same strike prices, you should make your decision based on whether using call options or put options give you a lower net debit per position so that you can put on more position for higher ROI.

Example : Assuming QQQQ trading at $43.57

Buy To Open 1 contract of Jan $41 Put at $0.20
Sell To Open 1 contract of Jan $42 Put at $0.59
Sell To Open 1 contract of Jan $45 Put at $1.84
Buy To Open 1 contract of Jan $46 Put at $2.80

Net Debit = ($0.20 - $0.59 - $1.84 + $2.80) x 100 = $57.00 per position


We see that the Call Albatross Spread is cheaper to establish than the Put Albatross Spread today, so the Call Albatross Spread should be used instead.



Profit Potential of Albatross Spread :


Albatross Spreads achieve their maximum profit potential at expiration if the price of the underlying asset is within the 2 middle strike prices. The profitability of a Albatross Spread can also be enhanced or better guaranteed by legging into the position properly.



Profit Calculation of Albatross Spread:


Maximum Profit = (Net Extrinsic Value in the position) x 100
Profit % = (Max Profit - Net Debit) / Net Debit

From the above Call Albatross Spread example :

Maximum Profit = (0.81 + 0.6) - (0.78 + 0.1) = 1.41 - 0.88 = 0.53 x 100 = $53

Profit % = ($53 - $47) / $47 = 12.76%




Risk / Reward of Albatross Spread:



Upside Maximum Profit: Limited

Maximum Loss: Limited to net debit paid



Break Even Point (Profitable Range) of Albatross Spread:


A Albatross Spread is profitable if the underlying asset expires within the profitable range bounded by the upper and lower breakeven points.

1. Lower Breakeven Point : Net Debit + Lower Strike Price

Net Debit = $0.47 , Lower Strike Price = $41.00

Lower Breakeven Point = $0.46 + $41.00 = $41.47.

And

2. Upper Breakeven Point : Higher Strike Price - Net Debit

Net Debit = $0.47 , Higher Strike Price = $46.00

Higher Breakeven Point = $46.00 - $0.47 = $45.53.


Profitable Range = $45.53 to $41.47 therefore a $4.06 price range.


Advantages Of Albatross Spread:



  • Largest profitable range of its class




    Disadvantages Of Albatross Spread:



  • Lowest maximum profit of its class

  • Highest net debit of its class

  • Highest maximum possible loss of its class



    Adjustments for Albatross 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.

    2. If the underlying asset has dropped in price and is expected to continue dropping, you could sell the long call options and hold the short call options. This action is only possible if your broker allows you to sell naked options.

    3. Advanced option traders may also close out the short or long leg and then buy or short the undelying asset in order to achieve a delta neutral position in order to protect whatever profit is left.


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