|
Learn How To Read This Chart
Bull Condor Spread - Introduction
The Bull Condor Spread is a complex bullish strategy that is used for speculating on the underlying stock rallying to a higher range of prices on very little cost and is a less accuracy demanding price targeting strategy than the Bull Butterfly Spread. Its extremely high reward risk ratio gives it an extremely high return on investment if the underlying stock performs as expected.
The Bull Condor Spread is basically a condor spread that brackets a higher strike price such that its maximum profit potential is only attained when the underlying stock rallies into that price bracket. This transforms the Condor Spread, which is a neutral options strategy, into a bullish options strategy.
Comparing The Bull Condor Spread
So, how does the Bull Condor Spread compare against its cousin, the Bull Butterfly Spread? Lets compare the two bullish price targeting options trading strategies and see where the differences are.
For this study, we expect the QQQ to reach the price of $46 by August expiration. The Bull Butterfly Spread shall aim for exactly $46 while the Bull Condor Spread would give a bit of allowance and aim for a range of $45 to $46.
QQQ options chain on 9 July 2010. QQQQ trading at $44.20.
Aug44Call = $1.65 , Aug45Call = $1.11 , Aug46Call = $0.68 , Aug47Call = $0.40
|
|
Strategy
|
Max Net Profit @ $46
|
Capital Outlay (Max Loss)
|
ROI
|
Max Profit Range
|
|
Bull Butterfly Spread*
|
$85
|
$15
|
560%
|
$46
|
|
Bull Condor Spread**
|
$74
|
$26
|
284%
|
$45 to $46
|
* : Bull Call Butterfly Spread was used
** : Bull Call Condor Spread was used
As you can see above, options trading rewards accuracy of outlook. If your price target on the underlying stock is extremely accurate, the Bull Butterfly Spread would give you the most bang for your bucks but if you would like to give a bit of allowance for mistakes and still achieve an extremely favorable reward risk ratio, the Bull Condor Spread in the example above returns almost a 3 times reward as long as the underlying stock remains within the predetermined price range.
When To Use Bull Condor Spread?
One should use a Bull Condor Spread when one expects the price of the underlying stock to move up to a certain higher price range by options expiration.
How To Use Bull Condor Spread?
There are two ways to establish a Bull Condor Spread. One way is to use only call options. We call this a "Bull Call Condor Spread". The other way is to
use only put options. We call that a "Bull Put Condor Spread". Either way uses the same strike prices and typically cost almost the same capital outlay, returning almost the same profit.
The composition of both kinds of Bull Condor Spread is the same. It involves writing options on the two higher strike prices which you think the underlying stock will close within by expiration and then buying to open 1 contract one strike lower and another contract one strike higher.
Buy 1 Lower Strike + Sell 1 One Strike Higher + Sell 1 One Strike Higher + Buy 1 Higher Strike
Establishing Bull Call Condor Spread
Veteran or experienced option traders would identify at this point that the Bull Call Condor Spread actually consists of an OTM Bull
Call Spread and an OTM Bear Call Spread with the short legs typically one strike apart.
The choice of short leg strike prices is the price range within which you expect the underlying stock to move into upon expiration of the position. The narrower the price range, the greater the reward but the more accurate your outlook would have to be. The wider the price range, the lower the reward but the less accurate your outlook need to be.
Bull Call Condor Spread Example
Using the data from the comparison example above
Buy To Open 1 contract of Aug $44 Call at $1.65
Sell To Open 1 contract of Aug $45 Call at $1.11
Sell To Open 1 contract of Aug $46 Call at $0.68
Buy To Open 1 contract of Aug $47 Call at $0.40
Net Debit = ($1.65 + $0.40) - ($1.11 + $0.68) x 100 = $26.00
|
In the above Call Bull Condor Spread example, we are expecting the QQQ to close between $45 and $46 on August expiration.
Establishing Bull Put Condor Spread
Establishing a Bull Put Butterfly Spread is exactly the same as establishing a Bull Call Butterfly Spread except that put options are used instead. Strike prices used are exactly the same. The resultant
net debit and maximum of a Bull Put Condor Spread is theoretically the same as you would use call options due to put call parity, however,
in practical options trading, sometimes Call options and Put options do not cost the same to put on. In stocks that are likely to be more bullish, its call options will be
more expensive than its put options and vice versa. Therefore, an options trader needs to calculate if a Bull Call Condor Spread or a Bull Put Condor Spread makes the most sense in the prevailing circumstances.
Bull Put Condor Spread Example
Buy To Open 1 contract of Aug $44 Put at $1.50
Sell To Open 1 contract of Aug $45 Put at $1.90
Sell To Open 2 contracts of Aug $46 Put at $2.47
Buy To Open 1 contract of Aug $47 Put at $3.17
Net Debit = ($1.50 + $3.17) - ($1.90 + $2.47) x 100 = $30.00
|
In this case, Bull Put Condor Spread requires a slightly higher net debit than the Bull Call Condor Spread, the Bull Call Condor Spread should be used instead.
Trading Level Required For Bull Condor Spread
A Level 3 options trading account that allows the execution of debit spreads is needed for the Bull Condor Spread. Read more about Options Account Trading Levels.
Profit Potential of Bull Condor Spread :
Bull Condor Spreads achieve their maximum profit potential when the underlying stock closes within the strike prices of the two short legs by expiration. The profitability of a Bull Condor Spread can also be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Bull Condor Spread:
Maximum Profit = Strike Difference between Long and Short Leg - debit
Maximum Loss = Net Debit
From the above Bull Call Butterfly Spread example :
Maximum Profit = [($46 - $45) - 0.26] x 100 = $74
Maximum Loss = $26
|
STOCK PICK MASTER!
"Probably The Most Accurate Stock Picks In The World..."
Risk / Reward of Bull Condor Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
Break Even Points of Bull Condor Spread:
A Bull Condor Spread is profitable if the price of the underlying stock remains between the higher and lower breakeven point.
1. Lower Breakeven Point : Lower Strike Price + Debit
From the above Bull Call Condor Spread example :
Debit = $0.26 , Lower Strike Price = $44.00
Lower Breakeven Point = $44 + $0.26 = $44.26.
|
And
2. Upper Breakeven Point : Higher Strike Price - Debit
From the above Bull Call Condor Spread example :
Debit = $0.26 , Upper Strike Price = $47.00
Higher Breakeven Point = $47.00 - $0.26 = $46.74.
|
In this case, our Bull Call Condor Spread makes a maximum profit of $74 if the QQQ closes between $45 and $46 during August Expiration and remains profitable if the QQQ closes within the price range of $44.26 to $46.74.
Advantages Of Bull Condor Spread:
:: High ROI.
:: Able to aim maximum profit point within any specific range you want.
:: Low capital requirement results in the low maximum loss.
Disadvantages Of Bull Condor Spread:
:: Larger commissions involved than the other bullish option strategies with lesser trades.
Adjustments for Bull Condor Spreads Before Expiration :
1. When it is obvious that the underlying stock is going to go into a sustained bull trend, you could close out the short and higher strike legs and then just hold the lower strike leg, transforming it into a long call position. This transformation can be automatically performed without monitoring using a Contingent Order.
|
|
