Condor Spread: Definition, Types, and Strategy Examples

What Is a Condor Spread?

A condor spread is a non-directional options strategy that limits both gains and losses while seeking to profit from either low or high volatility. There are two types of condor spreads. A long condor seeks to profit from low volatility and little to no movement in the underlying asset. A short condor seeks to profit from high volatility and a sizable move in the underlying asset in either direction.

Understanding Condor Spreads

The purpose of a condor strategy is to reduce risk, but that comes with reduced profit potential and the costs associated with trading several options legs. Condor spreads are similar to butterfly spreads because they profit from the same conditions in the underlying asset. The major difference is the maximum profit zone, or sweet spot, for a condor is much wider than that for a butterfly, although the trade-off is a lower profit potential. Both strategies use four options, either all calls or all puts.

As a combination strategy, a condor involves multiple options, with identical expiration dates, purchased and/or sold at the same time. For example, a long condor using calls is the same as running both an in-the-money long call, or bull call spread, and an out-of-the-money short call, or bear call spread. Unlike a long butterfly spread, the two sub-strategies have four strike prices, instead of three. Maximum profit is achieved when the short call spread expires worthless, while the underlying asset closes at or above the higher strike price in the long call spread. 

Types of Condor Spreads

1. Long Condor With Calls

This results in a net DEBIT to account.

• Buy a call with strike price A (the lowest strike):
• Sell a call with strike price B (the second lowest):
• Sell a call with strike price C (the second highest)
• Buy a call with strike price D (the highest strike)

At inception, the underlying asset should be close to the middle of strike B and strike C. If it is not at the middle, then the strategy takes on a slightly bullish or bearish bent. Note that for a long butterfly, strikes B and C would be the same.

2. Long Condor With Puts

This results in a net DEBIT to account.

• Buy a put with strike price A
• Sell a put with strike price B
• Sell a put with strike price C
• Buy a put with strike price D

The profit curve is the same as for the long condor with calls.

3. Short Condor With Calls

This results in a net CREDIT to account.

• Sell a call with strike price A (the lowest strike)
• Buy a call with strike price B (the second lowest)
• Buy a call with strike price C (the second highest)
• Sell a call with strike price D (the highest strike)

4. Short Condor With Puts

This results in a net CREDIT to account.

• Sell a put with strike price A (the lowest strike)
• Buy a put with strike price B (the second lowest)
• Buy a put with strike price C (the second highest)
• Sell a put with strike price D (the highest strike)

The profit curve is the same as for the short condor with calls.

Example of Long Condor Spread With Calls

The goal is to profit from the projected low volatility and neutral price action in the underlying asset. Maximum profit is realized when the underlying asset's price falls between the two middle strikes at expiration minus cost to implement the strategy and commissions. Maximum risk is the cost of implementing the strategy, in this case a net DEBIT, plus commissions. Two breakeven points (BEP): BEP1, where the cost to implement is added to the lowest strike price, and BEP2, where the cost to implement is subtracted from the highest strike price.

• Buy 1 ABC 45 call at 6.00 resulting in a DEBIT of $6.00
• Sell 1 ABC 50 call at 2.50 resulting in a CREDIT of $2.50
• Sell 1 ABC 55 call at 1.50 resulting in a CREDIT of $1.50
• Buy 1 ABC 60 call at 0.45 resulting in a DEBIT of $0.45
• Net DEBIT = ($2.45)
• Maximum Profit = $5 - $2.45 = $2.55 less commissions.
• Maximum Risk = $2.45 plus commissions.

Example of Short Condor Spread With Puts

The goal is to profit from the projected high volatility and the underlying asset's price moving beyond the highest or lowest strikes. Maximum profit is the net CREDIT received from implementing the strategy minus any commissions. Maximum risk is the difference between middle strike prices at expiration minus the cost to implement, in this case a net CREDIT, and commissions. Two breakeven points (BEP) - BEP1, where the cost to implement is added to the lowest strike price, and BEP2, where the cost to implement is subtracted from the highest strike price.

• Sell 1 ABC 60 put at 6.00 resulting in a CREDIT of $6.00
• Buy 1 ABC 55 put at 2.50 resulting in a DEBIT of $2.50
• Buy 1 ABC 50 put at 1.50 resulting in a DEBIT of $1.50
• Sell 1 ABC 45 put at 0.45 resulting in a CREDIT of $0.45
• Net CREDIT = $2.45
• Maximum Profit = $2.45 less commissions.
• Maximum Risk = $5 - $2.45 = $2.55 plus commissions.