butterflies condors

8/10/2019 Butterflies Condors

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Download What is a Spread?

Download: Butterflies and Condors

Basics of Spreading: Butterflies and Condors

What is a Spread?Review the links below for detailed information.

Terms and Characterizations: Part 1

Terms & Characterizations: Part 2

Spread Order Execution

Calculating Profit & Loss

Early Assignment Risk

More on Terminology

The StrategiesThe spreads discussed in this series, may be categorized with respect to their risk/reward profiles.

Profit limited & Loss limited Moderately Bullish Moderately Bearish Neutral

Bull Call Spread X

Bear Call Spread X

Bear Put Spread X

Bull Put Spread X

Long Call Time Spread X

Long Put Time Spread X

Long Call Butterfly X

Long Put Butterfly X

Iron Butterfly X

Long Call Condor X

Long Put Condor X

Iron Condor X

Profit not limited & Loss limi ted

Very Bullish Very Bearish Neutral

Long Straddle X

Long Strangle X

Call Backspread X

Put Backspread X

Profit limited & Loss not limited

Neutral to slightly Bullish Neutral to slightly Bearish Neutral

Ratio Call Spread X

Ratio Put Spread X

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Short Straddle X

Short Strangle X

NOTE: For each spread example discussed in this class it is assumed that all transactions are openingones. In other words, an investor would initially have no position, but after making the transactionsdescribed would have the spread position under discussion.

In order to simplify the computations, commissions and other costs have not been included in theexamples used in this course and may be significant. These costs will impact the outcome of all stockand options transactions and must be considered prior to entering into any transactions. Investorsshould consult their tax advisor about any potential tax consequences.

Long Call Butterfly

General Nature & Characteristics

The long call butterfly spread is made up entirely of call options on the sameunderlying stock (or index). It’s constructed by purchasing one call with a givenstrike price, selling (writing) two calls with a higher strike price, and purchasingone call with an even higher strike price. All calls have the same expiration month

, and the increment between strike prices is the same . The ratio of long to short

to long calls is always 1:2:1. The result is a position comprised of one long call(lowest strike), two short calls (middle strike) and one long call (highest strike). Aninvestor with this position can be said to be long a call butterfly spread or to have bought a call

butterfly spread.

Long call butterfly = buy 1 lowest-strike call + sell 2 middle-strike calls + buy 1 highest-strike call

Debit vs. Credit A long call butterfly spread will always be established at a net debit . In other words, the amount of cash paid out for the two long calls (different strikes) is more than the cash received for the two written

calls (middle strike).

Long call butterfly = debit spread

ExampleTo establish a long call butterfly spread with XYZ options, an investor might buy 1 XYZ June 55 call for $6.00, sell (write) 2 XYZ June 60 calls for $2.75 and buy 1 XYZ June 65 call for $1.00. The result is the

investor being long 1 XYZ June 55/60/65 call butterfly spread, at a $1.50 ($6.00 – $5.50 + $1.00) netdebit.

XYZ June 55/60/65 Long Call Butterfly

Action Quoted Price* Total Pri ce*

Buy 1 XYZ June 55 call - $6.00 - $600.00

Sell 2 XYZ June 60 calls + $2.75 x 2 + $550.00

Buy 1 XYZ June 65 call - $1.00 - $100.00

Net Debit - $1.50 - $150.00

*Excluding commissions


Long 1 XYZ June 55 call

Short 2 XYZ June 60 calls


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ExpectationThe long call butterfly spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize around the middle strike price of the short callsuntil expiration. As well, the investor wants a decrease in option implied volatility that could enhanceprofitability before expiration, perhaps with even more of a move in the underlying stock price (or indexlevel) than expected.

Long call butterfly: neutral

Motivation for SpreadingJust as a straddle seller is neutral on the underlying stock, so is the holder of a long call butterfly. Bothinvestors expect the underlying stock (or index) to stabilize around a specific strike price, and to profitfrom time decay as well as a possible decrease in volatility. By creating a long call butterfly spread,

however, an investor can avoid the up- and downside risk involved with a short straddle.

Long call butterfly: reduced (limited) risk

Risk vs . Reward

Maximum ProfitThe maximum profit for a long call butterfly spread is limited. This profit will be seen if the underlyingstock (or index) closes at the middle strike price of the short calls at expiration. In this case, themaximum profit is equal to the strike price differential (difference in strike prices) less the debit paid for the butterfly.

Maximum profit = limited(Underlying at middle strike at expiration)

Maximum LossThe maximum loss for a long call butterfly spread is limited entirely to the net debit initially paid for it.

This loss will be seen if the underlying stock (or index) closes at or below the lowest strike price, or ator above the highest strike price at expiration, no matter how high or low the underlying stock price (or index level) moves.

Maximum loss = limited to debit paid

(Underlying at/below lowest strike or at/above highest strike at expiration)

Break-Even PointThere are two break-even points (BEPs) for a long call butterfly at expiration, one to the upside andone to the downside. The upside break-even point is a closing underlying stock price (or index level)equal to the highest strike price minus the debit initially paid for the spread. The downside break-even

point, on the other hand, is equal to the lowest strike price plus the debit paid.

Upside break-even point = highest strike price – debit paidDownside break-even point = lowest strike price + debit paid

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Partial Profit

At expiration, if the underlying stock (or index) closes at a point between the middle strike price, and

either the up- or downside break-even point, a partial profit would be seen.

Profit & Loss Before Expiration

Before expiration, an investor can take a profit or cut a loss by selling the spread if it has market value.This involves selling the long calls and buying the short calls, which will be done at a net credit, andthese closing trades may be executed simultaneously in one spread transaction. Profit or loss wouldsimply be the net difference between the debit initially paid for the spread and the credit received at itssale.

Effect of Volatility

An increase in volatility has a negative effect on the long call butterfly; a decrease in volatility on the

other hand has a positive effect.

Effect of Time Decay

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Time decay has a positive effect on the long call butterfly, and this effect increases at a faster rate asexpiration nears.

Long Call Butterfly - Continued

Example



Short 2 XYZ June 60 calls


Net debit = $1.50 ($150 total)

Maximum ProfitThe maximum profit for this long call butterfly spread is limited and would be seen if the underlyingstock (or index) closes at the middle strike price of the short calls, or $60, at expiration. In this case,

the maximum profit would be equal to the $5.00 difference in strike prices less the $1.50 debit paid for the butterfly = $3.50 or $350 total.

Maximum profit = $5.00 strike difference – $1.50 debit paid = $3.50, or $350 total

Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55, or at or

above the highest strike price of $65, the maximum loss for this long call butterfly would be limited tothe net $1.50 debit paid for the spread, or $150 total.

Maximum loss = $1.50 debit paid, or $150 total

Break-Even Point At expiration, the upside break-even point for this long call butterfly would be a closing underlying

stock price (or index level) equal to $65 (highest strike price) – $1.50 (debit paid) = $63.50. Thedownside break-even point would be with the underlying stock (or index) closing at $55 (lowest strike

price) + $1.50 (debit paid) = $56.50.

Upside break-even point = $65 strike – $1.50 debit paid = $63.50Downside break-even point = $55 strike + $1.50 debit paid = $56.50

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Long XYZ June 55/60/65 Call ButterflyPaid $1.50 Net Debit = $150 Total

Results at Expiration

XYZ PriceLong

55 Call

Value

Short 260 Calls

Value

Long65 Call

Value

Valueof

Spread

ButterflyProfit/Loss*

70 + $1500 – $2000 + $500 0 – $150

65 + $1000 – $1000 0 0 – $15063.50 + $850 – $700 0 + $150 0

62 + $700 – $400 0 + $300 + $150

60 + $500 0 0 + $500 + $350

58 + $300 0 0 + $300 + $150

56.50 + $150 0 0 + $150 0

55 0 0 0 0 – $150

50 0 0 0 0 – $150


Assignment Risk

Assignment on any Equity option or American-style index option can, by contract terms, occur at anytime before expiration, although this generally occurs when the option is in-the-money.

Equity Options

For an equity call option, early assignment usually occurs under specific circumstances; such as whenunderlying shareholders are about to be paid a dividend. Assignment at that time might be expectedwhen the dividend amount is greater than the time value in the call’s premium, and notice of assignment may be received as late as the ex-dividend date. If a long call butterfly spread holder isassigned early on in-the-money short calls, then he may exercise as many long calls and buy shares

to fulfill the assignment obligation. If assigned on more short calls than in-the-money calls he is long,then he must either purchase underlying shares for delivery to fulfill his assignment obligation, or takea short position in those shares.

American-Style Index OptionsIf early assignment is received on in-the-money short calls of a long call butterfly spread, the cashsettlement procedure for index options will create a debit in the investor’s brokerage account equal tothe cash settlement amount. This cash amount is determined at the end of the day the long call isexercised by its owner. After receiving assignment notification, usually the next business day, when theinvestor exercises his long calls the cash settlement amount credited to his account will be determinedat the end of that day. There is a full day’s market risk if the long option is not sold during the tradingday assignment is received.

If assigned on more short calls than in-the-money calls he is long, the cash settlement procedure willcreate a debit in the investor’s brokerage account equal to the cash settlement amount.

Long Put Butterfly


The long put butterfly spread is made up entirely of put options on the sameunderlying stock (or index). It’s constructed by purchasing one put with a givenstrike price, selling (writing) two puts with a higher strike price, and purchasingone put with an even higher strike price. All puts have the same expiration month

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, and the increment between strike prices is the same . The ratio of long to shortto long puts is always 1:2:1. The result is a position comprised of one long put

(lowest strike), two short puts (middle strike) and one long put (highest strike). Aninvestor with this position can be said to be long a put butterfly spread, or to havebought a put butterfly spread.

Long put butterfly = buy 1 lowest-strike put + sell 2 middle-strike puts + buy 1 highest-strike put

Debit vs. Credit

A long put butterfly spread will always be established at a net debit . In other words, the amount of cash paid out for the two long puts (different strikes) is more than the cash received for the two writtenputs (middle strike).

Long put butterfly = debit spread

Example

To establish a long put butterfly spread with XYZ options, an investor might buy 1 XYZ June 55 put for $0.75, sell (write) 2 XYZ June 60 puts for $2.75 and buy 1 XYZ June 65 put for $5.75. The result is theinvestor being long 1 XYZ June 65/60/55 put butterfly spread, at a $1.00 ($0.75 – $5.50 + $5.75) netdebit.

XYZ June 55/60/65 Long Put But terfly


Buy 1 XYZ June 55 put - $0.75 - $75.00

Sell 2 XYZ June 60 putss + $2.75 x 2 + $550.00

Buy 1 XYZ June 65 put - $5.75 - $575.00

Net Debit - $1.00 - $100.00


XYZ June 55/60/65 Long Put But terflyLong 1 XYZ June 55 put

Short 2 XYZ June 60 puts

Long 1 XYZ June 65 put

ExpectationThe long put butterfly spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize around the middle strike price of the short putsuntil expiration. As well, the investor wants a decrease in option implied volatility that could enhance

profitability before expiration, perhaps with even more of a move in underlying stock price (or index

level) than expected.

Long put butterfly: neutral

Motivation for SpreadingJust as a straddle seller is neutral on the underlying stock, so is the holder of a long put butterfly. Both

investors expect the underlying stock (or index) to stabilize around a specific strike price, and to profitfrom time decay as well as a possible decrease in volatility. By creating a long put butterfly spread,however, an investor can avoid the up- and downside risk involved with a short straddle.

Long put butterfly: reduced (limited) risk

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Risk vs . Reward

Maximum ProfitThe maximum profit for a long put butterfly spread is limited. This profit will be seen if the underlyingstock (or index) closes at the middle strike price of the short puts at expiration. In this case, themaximum profit is equal to the strike price differential (difference in strike prices) less the debit paid for

the butterfly.

Maximum profit = limited(Underlying at middle strike at expiration)

Maximum LossThe maximum loss for a long put butterfly spread is limited entirely to the net debit initially paid for it.This loss will be seen if the underlying stock (or index) closes at or below the lowest strike price, or ator above the highest strike price at expiration, no matter how high or low the underlying stock price (or index level) moves.



Break-Even PointThere are two break-even points (BEPs) for a long put butterfly at expiration, one to the upside andone to the downside. The upside break-even point is a closing underlying stock price (or index level)

equal to the highest strike price minus the debit initially paid for the spread. The downside break-evenpoint, on the other hand, is equal to the lowest strike price plus the debit paid.


Partial Profit At expiration, if the underlying stock (or index) closes at a point between the middle strike price, and

either the up- or downside break-even point, a partial profit would be seen.

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Before expiration, an investor can take a profit or cut a loss by closing the spread. This involves sellingthe long puts and buying the short puts, which will be done at a net credit, and these closing tradesmay be executed simultaneously in one spread transaction. Profit or loss would simply be the netdifference between the debit initially paid for the spread and the credit received at its sale.


An increase in volatility has a negative effect on the long put butterfly; a decrease in volatility on theother hand has a positive effect.


Time decay has a positive effect on the long put butterfly, and this effect increases at a faster rate asexpiration nears.

Long Put Butterfly - Continued

Example

XYZ June 55/60/65 Long Put But terfly


Short 2 XYZ June 60 puts



Maximum ProfitThe maximum profit for this long put butterfly spread is limited and would be seen if the underlyingstock (or index) closes at the middle strike price of the short puts, or $60, at expiration. In this case,the maximum profit would be equal to the $5.00 difference in strike prices less the $1.00 debit paid for the butterfly = $4.00 or $400 total.


Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55, or at or above the highest strike price of $65, the maximum loss for this long put butterfly would be limited to

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the net $1.00 debit paid for the spread, or $100 total.


Break-Even Point At expiration, the upside break-even point for this long put butterfly would be a closing underlying stockprice (or index level) equal to $65 (highest strike price) – $1.00 (debit paid) = $64.00. The downsidebreak-even point would be with the underlying stock (or index) closing at $55 (lowest strike price) +$1.00 (debit paid) = $56.00.

Upside break-even point = $65 strike – $1.00 debit paid = $64.00

Downside break-even point = $55 strike + $1.00 debit paid = $56.00

Long XYZ June 55/60/65 Put But terflyPaid $1.00 Net Debit = $100 Total


XYZ PriceLong55 PutValue

Short 260 PutsValue

Long65 PutValue

Valueof

Spread


70 0 0 0 0 – $100

65 0 0 0 0 – $100

64 0 0 + $100 + $100 0

62 0 0 + $300 + $300 + $20060 0 0 + $500 + $500 + $400

58 0 – $400 + $700 + $300 + $200

56 0 – $800 + $900 + $100 0

55 0 – $1000 + $1000 0 – $100

50 + $500 – $2000 + $1500 0 – $100


Assignment Risk

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Equity OptionsFor an equity put option, early assignment generally occurs when the short put is deep in-the-money,expiration is relatively near, and its premium has little or no time value. If a long put butterfly spreadholder is assigned early on in-the-money short puts, then he may exercise as many long puts and sellshares purchased via the assignment obligation. If assigned on more short puts than in-the-money

puts he is long, then he must purchase underlying shares.

American-Style Index OptionsIf early assignment is received on in-the-money short puts of a long put butterfly spread, the cash

settlement procedure for index options will create a debit in the investor’s brokerage account equal tothe cash settlement amount. This cash amount is determined at the end of the day the long put isexercised by its owner. After receiving assignment notification, usually the next business day, when theinvestor exercises his long puts the cash settlement amount credited to his account will be determinedat the end of that day. There is a full day’s market risk if the long option is not sold during the tradingday assignment is received.

If assigned on more short puts than in-the-money puts he is long, the cash settlement procedure will

create a debit in the investors brokerage account equal to the cash settlement amount.

Iron Butterfly


A long synthetic, or “iron,” butterfly spread is made up of both call options andput options on the same underlying stock (or index). It’s constructed bypurchasing one put with a given strike price, selling one call and one put with ahigher strike price, and purchasing one call with an even higher strike price. Alloptions have the same expiration month , and the increment between strike

prices is the same. The ratio of long put to short call & put to long call is always1:2:1. The result is a position comprised of one long put (lowest strike), a short

call and a short put (middle strike) and one long call (highest strike). An investor with this position canbe said to be long (or hold) an iron butterfly spread, or long (hold) a synthetic butterfly spread.

Long iron butterfly = buy 1 lowest-strike put + sell 1 call & 1 put with middle-strike + buy 1 highest-strike call

Note: There are two ways to view the composition of this iron butterfly spread. First, it is a short

straddle (short call & put with middle strike), with the downside protected by a long put (lowest strike)and the upside protected by a long call (highest strike). Or second, it is constructed with two verticalspreads: a bull put spread (long lowest-strike put and short middle-strike put) and a bear call spread(long highest-strike call and short middle-strike call). Even though this spread is established at a netcredit, it may be considered “long” because the profit & loss profile resembles a long call or long putbutterfly.

Debit vs. Credit A long iron butterfly spread constructed in the above manner will always be established at a net credit .In other words, the amount of cash paid out for the two long options (call & put) is less than the cashreceived for the two written options (call & put).

Long iron butterfly = credit spread

ExampleTo establish a long iron butterfly spread with XYZ options, an investor might buy 1 XYZ June 55 put for $0.75, sell (write) 1 XYZ June 60 put for $2.50 and 1 XYZ June 60 call for $2.80, and buy 1 XYZ June65 call for $1.00. The result is the investor being long 1 XYZ June 55/60/65 iron butterfly spread, at a

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$3.55 (– $0.75 + $2.80 + $2.50 – $1.00) net credit.

Long XYZ June 55/60/65 Iron Butterfly


Buy 1 XYZ June 55 put – $0.75 – $75.00

Sell 1 XYZ June 60 put + $2.50 + $250.00

Sell 1 XYZ June 60 call + $2.80 + $280.00Buy 1 XYZ June 65 call – $1.00 – $100.00

Net Credit + $3.55 + $355.00




Short 1 XYZ June 60 put

Short 1 XYZ June 60 call


ExpectationThe long iron butterfly spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize around the middle strike price of the short calland put until expiration. As well, the investor wants a decrease in option implied volatility that couldenhance profitability before expiration, perhaps with even more of a move in the underlying stock price(or index level) than expected.

Long iron butterfly: neutral

Motivation for SpreadingJust as a straddle seller is neutral on the underlying stock, so is the holder of a long iron butterfly. Bothinvestors expect the underlying stock (or index) to stabilize around a specific strike price, and to profitfrom time decay as well as a possible decrease in volatility. By creating a long iron butterfly spread,

however, an investor can avoid the up- and downside risk involved with a short straddle.

Long iron butterfly: reduced (limited) risk

Risk vs . Reward

Maximum Profit

The maximum profit for a long iron butterfly spread is limited. This profit will be seen if the underlyingstock (or index) closes at the middle strike price of the short call and put at expiration. In this case, themaximum profit is equal to the credit received when establishing the spread.

Maximum profit = limited to credit received(Underlying at middle strike at expiration)

Maximum LossThe maximum loss for a long iron butterfly spread is limited entirely to the strike price differential(difference in strikes) less the credit initially received when the spread is established. This loss will beseen if the underlying stock (or index) closes at or below the lowest strike price (long put), or at or above the highest strike price at expiration (long call), no matter how high or low the underlying stock

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price (or index level) moves.

Maximum loss = limited to strike price differential – credit received(Underlying at/below lowest strike or at/above highest strike at expiration)

Break-Even PointThere are two break-even points (BEPs) for a long iron butterfly at expiration, one to the upside andone to the downside. The upside break-even point is a closing underlying stock price (or index level)equal to the middle strike price plus the credit initially received for the spread. The downside

break-even point, on the other hand, is equal to the middle strike price less the credit received.

Upside break-even point = middle strike price + credit receivedDownside break-even point = middle strike price – credit received

Partial Profit At expiration, if the underlying stock (or index) closes at a point between the middle strike price, andeither the up- or downside break-even point, a partial profit would be seen.

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Before expiration, an investor can take a profit or cut a loss by closing the spread if it has marketvalue. This involves selling the long call and put and buying the short call and put, which will be done

at a net debit, and these closing trades may be executed simultaneously in one spread transaction.Profit or loss would simply be the net difference between the credit initially received for the spread andthe debit paid at its closing.


An increase in volatility has a negative effect on the long iron butterfly; a decrease in volatility on theother hand has a positive effect.


Time decay has a positive effect on the long iron butterfly, and this effect increases at a faster rate asexpiration nears.

Iron Butterfly - Continued

Example






Net credit = $3.55 ($355 total)

Maximum Profit

The maximum profit for this long iron butterfly spread is limited, and would be seen if the underlyingstock (or index) closes at the middle strike price of the short call and short put, or $60, at expiration. In

this case, the maximum profit would be equal to the $3.55 credit initially received for the spread, or $355 total.

Maximum profit = $3.55 credit received, or $355 total

Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55 (longput), or at or above the highest strike price of $65 (long call), the maximum loss for this long ironbutterfly would be limited to the $5.00 strike price differential – $3.55 credit initially received for thespread = $1.45, or $145 total.

Maximum loss = $5.00 strike differential – $3.55 credit received = $1.45, or $145 total

Break-Even Point At expiration, the upside break-even point for this long iron butterfly would be a closing underlyingstock price (or index level) equal to $60 (middle strike price) + $3.55 (credit received) = $63.55. Thedownside break-even point would be with the underlying stock (or index) closing at $60 (middle strikeprice) – $3.55 (credit received) = $56.45.

Upside break-even point = $60 strike + $3.55 debit paid = $63.55Downside break-even point = $60 strike – $3.55 debit paid = $56.45

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Long XYZ June 55/60/65 Iron ButterflyReceived $3.55 Net Credi t = $355 Total


XYZ PriceLong

55 PutValue

Short60 PutValue

Short60 CallValue

Long65 CallValue

Valueof

Spread


70 0 0 – $1000 + $500 – $500 – $145

65 0 0 – $500 0 – $500 – $145

63.55 0 0 – $355 0 – $355 0

62 0 0 – $200 0 – $200 + $155

60 0 0 0 0 0 + $35558 0 – $200 0 0 – $200 + $155

56.45 0 – $355 0 0 – $355 0

55 0 – $500 0 0 – $500 – $145

50 + $500 – $1000 0 0 – $500 – $145


Assignment Risk


Equity OptionsFor an equity call option, early assignment usually occurs under specific circumstances; such as whenunderlying shareholders are about to be paid a dividend. Assignment at that time might be expectedwhen the dividend amount is greater than the time value in the call’s premium, and notice of assignment may be received as late as the ex-dividend date.

If a long iron butterfly holder is assigned early on the short call, then he must deliver underlying sharesby either exercising his long call if it is in-the-money, purchasing them in the marketplace (at a realized

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loss), or by taking a short stock position. He would still retain the rest of the iron butterfly position.

For an equity put option, early assignment generally occurs when the short put is deep in-the-money,expiration is relatively near, and its premium has little or no time value. If a long iron butterfly holder isassigned early on the short put, he must buy underlying shares. Then, he may exercise his long put, if it is in-the-money, and sell those shares, or take a long stock position. He would still retain the rest of the iron butterfly position.

American-Style Index Options

If early assignment is received on an in-the-money short call (or put) of a long iron butterfly spread, thecash settlement procedure for index options will create a debit in the investor’s brokerage account

equal to the cash settlement amount. This cash amount is determined at the end of the day the longcall (or put) is exercised by its owner.

After receiving assignment notification, usually the next business day, if his long call (or put) is alsoin-the-money the investor may exercise that contract. The cash settlement amount credited to hisaccount will be determined at the end of that day, and there is a full day’s market risk if the long option

is not sold during the trading day assignment is received. If the long call (or put) is not in-the-money,after the cash settlement amount is debited from his account via assignment the investor would stillretain the rest of the iron butterfly position.

Long Call Condor


The long call condor spread is made up entirely of call options on the sameunderlying stock (or index). It’s constructed by purchasing one call with thelowest strike price, selling (writing) a call with a higher strike price, selling(writing) another call with an even higher strike price, and purchasing a call withthe highest strike price. All calls have the same expiration month , and theincrement between strike prices is the same. The ratio of long to short to shortto long calls is always 1:1:1:1 . The result is a position comprised of one long

call (lowest strike), two short calls (2 middle strike prices) and one long call (highest strike). An investor with this position can be said to be long a call condor spread.

Long call condor =buy 1 lowest-strike call + sell 1 higher-strike call + sell 1 even higher-strike call + buy 1 highest-strikecall

Note: One way to view a long call condor spread is as a long call butterfly with the two short calls onestrike price apart. For this reason you might see this spread referred to as a “flat-top butterfly” or an

“elongated butterfly.”

Debit vs. Credit A long call condor spread will always be established at a net debit . In other words, the amount of cashpaid out for the two long calls (highest and lowest strikes) is more than the cash received for the two

written calls (middle strikes).

Long call condor = debit spread

ExampleTo establish a long call condor spread with XYZ options, an investor might buy 1 XYZ June 55 call for $7.90, sell 1 XYZ June 60 call for $4.35, sell 1 XYZ June 65 call for $1.85, and buy 1 XYZ June 70 callfor $0.50.

The result is the investor being long 1 XYZ June 55/60/65/70 call condor spread, at a $2.20 (– $7.90 +

$4.35 + $1.85 – $0.50) net debit.

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Long XYZ June 55/60/65/70 Call Condor


Buy 1 XYZ June 55 call - $7.90 - $790.00

Sell 1 XYZ June 60 call + $4.35 + $435.00


Buy 1 XYZ June 70 call - $0.50 - $50.00

Net Debit - $2.20 - $220.00







ExpectationThe long call condor spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize between the two middle strike prices of the shortcalls until expiration. As well, the investor wants a decrease in option implied volatility that couldenhance profitability before expiration, perhaps with even more of a move in the underlying stock price(or index level) than expected.

Long call condor: neutral

Motivation for SpreadingJust as a long call butterfly holder is neutral on the underlying stock, so is the holder of a long callcondor. The buyer of a call condor, however, can see maximum profit over a range of closing

underlying stock prices (or index levels) at expiration, instead of at a single strike price like the longcall butterfly holder.

Long call condor: increased chance of profitability

Risk vs . Reward

Maximum Profit

The maximum profit for a long call condor spread is limited. This profit will be seen if the underlyingstock (or index) closes at or between the two middle strike prices of the short calls at expiration. Themaximum profit amount is equal to the strike price differential (difference in strike prices) less the debit

paid for the condor.

Maximum profit = limited(Underlying at/between 2 middle strikes at expiration)

Maximum LossThe maximum loss for a long call condor spread is limited entirely to the net debit initially paid for it.This loss will be seen if the underlying stock (or index) closes at or below the lowest strike price, or ator above the highest strike price at expiration, no matter how high or low the underlying stock price (or index level) moves.


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Break-Even PointThere are two break-even points (BEPs) for a long call condor at expiration, one to the upside and one

to the downside. The upside break-even point is a closing underlying stock price (or index level) equalto the highest strike price minus the debit initially paid for the spread. The downside break-even point,on the other hand, is equal to the lowest strike price plus the debit paid.

Upside break-even point = highest strike price – debit paid

Downside break-even point = lowest strike price + debit paid

Partial Profit At expiration, if the underlying stock (or index) closes at a point between the middle strike prices, andeither the up- or downside break-even point, a partial profit would be seen.


Before expiration, an investor can take a profit or cut a loss by selling the spread if it has market value.This involves selling the long calls and buying the short calls, which will be done at a net credit, andthese closing trades may be executed simultaneously in one spread transaction. Profit or loss would

simply be the net difference between the debit initially paid for the spread and the credit received at its

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sale.


An increase in volatility has a negative effect on the long call condor; a decrease in volatility on theother hand has a positive effect.


Time decay has a positive effect on the long call condor, and this effect increases at a faster rate asexpiration nears.

Long Call Condor - Continued

Example





Long 1 XYZ June 70 callNet debit = $2.20 ($220 total)

Maximum ProfitThe maximum profit for this long call condor spread is limited and would be seen if the underlyingstock (or index) closes at or between the two middle, short call strike prices of $60 and $65 atexpiration. The maximum profit amount is equal to the $5.00 strike price differential (difference in strikeprices) – $2.20 debit paid for the condor = $2.80, or $280 total.


Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55, or at or above the highest strike price of $70, the maximum loss for this long call condor would be limited tothe net $2.20 debit paid for the spread, or $220 total.


Break-Even Point At expiration, the upside break-even point for this long call condor would be a closing underlying stockprice (or index level) equal to $70 (highest strike price) – $2.20 (debit paid) = $67.80. The downsidebreak-even point would be with the underlying stock (or index) closing at $55 (lowest strike price) +$2.20 (debit paid) = $57.20.

Upside break-even point = $70 strike – $2.20 debit paid = $67.80

Downside break-even point = $55 strike + $2.20 debit paid = $57.20

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Paid $2.20 Net Debit = $220 TotalResults at Expiration

XYZ PriceLong

55 CallValue

Short60 CallValue

Short65 CallValue

Long70 CallValue

Value of Spread

SpreadProfit/Loss*

75 + $2000 – $1500 – $1000 + $500 0 – $220

70 + $1500 – $1000 – $500 0 0 – $220

69 + $1400 – $900 – $400 0 + $100 – $120

67.80 + $1280 – $780 – $280 0 + $220 0

67 + $1200 – $700 – $200 0 + $300 + $80

65 + $1000 – $500 0 0 + $500 + $280

62 + $700 – $200 0 0 + $500 + $280

60 + $500 0 0 0 + $500 + $280

58 + $300 0 0 0 + $300 + $80

57.20 + $220 0 0 0 + $220 0

56 + $100 0 0 0 + $100 – $120

55 0 0 0 0 0 – $220

50 0 0 0 0 0 – $220


Assignment Risk


Equity OptionsFor an equity call option, early assignment usually occurs under specific circumstances; such as whenunderlying shareholders are about to be paid a dividend. Assignment at that time might be expectedwhen the dividend amount is greater than the time value in the call’s premium, and notice of assignment may be received as late as the ex-dividend date.

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If a long call condor spread holder is assigned early on in-the-money short calls, then he may exercise

as many long calls and buy shares to fulfill the assignment obligation. If assigned on more short callsthan in-the-money calls he is long, then he must either purchase underlying shares for delivery to fulfillhis assignment obligation, or take a short position in those shares.

American-Style Index OptionsIf early assignment is received on in-the-money short calls of a long call condor spread, the cash

settlement procedure for index options will create a debit in the investor’s brokerage account equal to

the cash settlement amount. This cash amount is determined at the end of the day the long call isexercised by its owner. After receiving assignment notification, usually the next business day, when the

investor exercises his long calls the cash settlement amount credited to his account will be determinedat the end of that day. There is a full day’s market risk if the long option is not sold during the tradingday assignment is received.

If assigned on more short calls than in-the-money calls he is long, the cash settlement procedure willcreate a debit in the investor’s brokerage account equal to the cash settlement amount.

Long Put Condor


The long put condor spread is made up entirely of put options on the same

underlying stock (or index). It’s constructed by purchasing one put with thelowest strike price, selling (writing) a put with a higher strike price, selling(writing) another put with an even higher strike price, and purchasing a put withthe highest strike price. All puts have the same expiration month , and theincrement between strike prices is the same . The ratio of long to short to shortto long puts is always 1:1:1:1 . The result is a position comprised of one long put (lowest strike), twoshort puts (2 middle strike prices) and one long put (highest strike). An investor with this position canbe said to be long a put condor spread.

Long put condor =buy 1 lowest-strike put + sell 1 higher-strike put + sell 1 even higher-strike put + buy 1 highest-strike

put

Note: One way to view a long put condor spread is as a long put butterfly with the two short puts onestrike price apart. For this reason, you might see this spread referred to as a “flat-top butterfly” or an

“elongated butterfly.”

Debit vs. Credit A long put condor spread will always be established at a net debit . In other words, the amount of cashpaid out for the two long puts (highest and lowest strikes) is more than the cash received for the two

written puts (middle strikes).

Long put condor = debit spread

ExampleTo establish a long put condor spread with XYZ options, an investor might buy 1 XYZ June 55 put for $0.35, sell 1 XYZ June 60 put for $1.75, sell 1 XYZ June 65 put for $4.30, and buy 1 XYZ June 70 put

for $8.00.

The result is the investor being long 1 XYZ June 55/60/65/70 put condor spread, at a $2.30 (– $0.35 +$1.75 + $4.30 – $8.00) net debit.

Long XYZ June 55/60/65/70 Put Condor

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Buy 1 XYZ June 55 put - $0.35 - $35.00

Sell 1 XYZ June 60 put + $1.75 + $175.00

Sell 1 XYZ June 65 put + $4.30 + $430.00

Buy 1 XYZ June 70 put - $8.00 - $800.00

Net Debit - $2.30 - $230.00







ExpectationThe long put condor spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize between the two middle strike prices of the shortputs until expiration. As well, the investor wants a decrease in option implied volatility that couldenhance profitability before expiration, perhaps with even more of a move in theunderlying stock price(or index level) than expected.

Long put condor: neutral

Motivation for SpreadingJust as a long put butterfly holder is neutral on the underlying stock, so is the holder of a long putcondor. The buyer of a put condor, however, can see maximum profit over a range of closingunderlying stock prices (or index levels) at expiration, instead of at a single strike price like the long put

butterfly holder.

Long put condor: increased chance of profitability

Risk vs . Reward

Maximum ProfitThe maximum profit for a long put condor spread is limited. This profit will be seen if the underlyingstock (or index) closes at or between the two middle strike prices of the short puts at expiration. Themaximum profit amount is equal to the strike price differential (difference in strike prices) less the debitpaid for the condor.


Maximum LossThe maximum loss for a long put condor spread is limited entirely to the net debit initially paid for it.This loss will be seen if the underlying stock (or index) closes at or below the lowest strike price, or ator above the highest strike price at expiration, no matter how high or low the underlying stock price (or index level) moves.



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Break-Even PointThere are two break-even points (BEPs) for a long put condor at expiration, one to the upside and oneto the downside. The upside break-even point is a closing underlying stock price (or index level) equalto the highest strike price minus the debit initially paid for the spread. The downside break-even point,

on the other hand, is equal to the lowest strike price plus the debit paid.


Partial Profit At expiration, if the underlying stock (or index) closes at a point between the middle strike prices, andeither the up- or downside break-even point, a partial profit would be seen.


Before expiration, an investor can take a profit or cut a loss by selling the spread if it has market value.This involves selling the long puts and buying the short puts, which will be done at a net credit, andthese closing trades may be executed simultaneously in one spread transaction. Profit or loss wouldsimply be the net difference between the debit initially paid for the spread and the credit received at itssale.

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An increase in volatility has a negative effect on the long put condor; a decrease in volatility on theother hand has a positive effect.


Time decay has a positive effect on the long put condor, and this effect increases at a faster rate as

expiration nears.

Long Put Condor - Continued

Example







Maximum ProfitThe maximum profit for this long put condor spread is limited and would be seen if the underlying stock(or index) closes at or between the two middle, short put strike prices of $60 and $65 at expiration. Themaximum profit amount is equal to the $5.00 strike price differential (difference in strike prices) – $2.30debit paid for the condor = $2.70, or $270 total.


Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55, or at or

above the highest strike price of $70, the maximum loss for this long put condor would be limited to thenet $2.30 debit paid for the spread, or $230 total.


Break-Even Point At expiration, the upside break-even point for this long put condor would be a closing underlying stock

price (or index level) equal to $70 (highest strike price) – $2.30 (debit paid) = $67.70. The downsidebreak-even point would be with the underlying stock (or index) closing at $55 (lowest strike price) +$2.30 (debit paid) = $57.30.

Upside break-even point = $70 strike – $2.30 debit paid = $67.70Downside break-even point = $55 strike + $2.30 debit paid = $57.30

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Long XYZ June 55/60/65/70 Put Condor Paid $2.30 Net Debit = $230 Total


XYZ PriceLong

55 PutValue

Short60 PutValue

Short65 PutValue

Long70 PutValue

Value of Spread

SpreadProfit/Loss*

75 0 0 0 0 0 – $230

70 0 0 0 0 0 – $230

69 0 0 0 + $100 + $100 – $130

67.70 0 0 0 + $230 + $230 0

67 0 0 0 + $300 + $300 + $7065 0 0 0 + $500 + $500 + $270

62 0 0 – $300 + $800 + $500 + $270

60 0 0 – $500 + $1000 + $500 + $270

58 0 – $200 – $700 + $1200 + $300 + $70

57.30 0 – $270 – $770 + $1270 + $230 0

56 0 – $400 – $900 + $1400 + $100 – $130

55 0 – $500 – $1000 + $1500 0 – $230

50 + $500 – $1000 – $1500 + $2000 0 – $230


Assignment Risk


Equity OptionsFor an equity put option, early assignment generally occurs when the short put is deep in-the-money,expiration is relatively near, and its premium has little or no time value. If a long put condor spreadholder is assigned early on in-the-money short puts, then he may exercise as many long puts and sell

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shares purchased via the assignment obligation. If assigned on more short puts than in-the-moneyputs he is long, then he must purchase underlying shares.

American-Style Index OptionsIf early assignment is received on in-the-money short puts of a long put condor spread, the cashsettlement procedure for index options will create a debit in the investor’s brokerage account equal tothe cash settlement amount. This cash amount is determined at the end of the day the long put isexercised by its owner. After receiving assignment notification, usually the next business day, when the

investor exercises his long puts the cash settlement amount credited to his account will be determined

at the end of that day. There is a full day’s market risk if the long option is not sold during the tradingday assignment is received.

If assigned on more short puts than in-the-money puts he is long, the cash settlement procedure willcreate a debit in the investor’s brokerage account equal to the cash settlement amount.

Iron Condor


A long synthetic, or “iron,” condor spread is made up of both call options and putoptions on the same underlying stock (or index). It’s constructed by purchasing oneput with the lowest strike price, selling one put with a higher strike price, selling onecall with an even higher strike price, and purchasing one call with the highest strike

price. All options have the same expiration month , and the increment between

strike prices is the same . The ratio of long put to short put to short call to long callis always 1:1:1:1 . The result is a position comprised of a long put (lowest strike), ashort put (higher strike), a short call (even higher strike) and one long call (higheststrike). An investor with this position can be said to be long (or hold) an iron condor spread, or long(hold) a synthetic condor spread.

Long iron condor =buy 1 lowest-strike put + sell 1 higher-strike put + sell 1 even higher-strike call + buy 1 highest-strike

call

Note: There are two ways to view the composition of this iron condor spread. First, it is a shortstrangle (short call & put with two middle strikes), with the downside protected by a long put (loweststrike) and the upside protected by a long call (highest strike). Or second, it is constructed with twovertical spreads: a bull put spread (long lowest-strike put and short higher-strike put) and a bear call

spread (long highest-strike call and short lower-strike call). Even though this spread is established at anet credit, it may be considered “long” because the profit & loss profile resembles a long call or longput condor.

Debit vs. Credit

A long iron condor spread constructed in the above manner will always be established at a net credit .In other words, the amount of cash paid out for the two long options (call & put) is less than the cashreceived for the two written options (call & put).

Long iron condor = credit spread

Example

To establish a long iron condor spread with XYZ options, an investor might buy 1 XYZ June 55 put for $0.35, sell (write) 1 XYZ June 60 put for $1.75, sell (write) 1 XYZ June 65 call for $1.80, and buy 1XYZ June 70 call for $0.50. The result is the investor being long 1 XYZ June 55/60/65/70 iron condor spread, at a $2.70 (– $0.35 + $1.75 + $1.80 – $0.50) net credit.

Long XYZ June 55/60/65/70 Iron Condor

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Buy 1 XYZ June 55 put – $0.35 – $35.00

Sell 1 XYZ June 60 put + $1.75 + $175.00


Buy 1 XYZ June 70 call – $0.50 – $50.00

Net Credit + $2.70 + $270.00







ExpectationThe long iron condor spread is a neutral position. An investor employing this strategy is neutral on theunderlying stock (or index), and expects it to stabilize between the middle two strike prices of the shortput and short call until expiration. As well, the investor wants a decrease in option implied volatility thatcould enhance profitability before expiration, perhaps with even more of a move in the underlying stockprice (or index level) than expected.

Long iron condor: neutral

Motivation for SpreadingJust as a long call or put butterfly holder is neutral on the underlying stock, so is the holder of a longiron condor. The holder of a long iron condor, however, can see maximum profit over a range of closing underlying stock prices (or index levels) at expiration, instead of at a single strike price like the

long butterfly holder.

Long iron condor: increased chance of profitability

Risk vs . Reward

Maximum ProfitThe maximum profit for a long iron condor spread is limited. This profit will be seen if the underlyingstock (or index) closes at or between the middle strike prices of the short call and put at expiration. Inthis case, the maximum profit is equal to the credit received when establishing the spread.


Maximum LossThe maximum loss for a long iron condor spread is limited entirely to the strike price differential(difference in strikes) less the credit initially received when the spread is established. This loss will beseen if the underlying stock (or index) closes at or below the lowest strike price (long put), or at or above the highest strike price at expiration (long call), no matter how high or low the underlying stockprice (or index level) moves.

Maximum loss = limited to strike price differential – credit received


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Break-Even PointThere are two break-even points (BEPs) for a long iron condor at expiration, one to the upside and oneto the downside. The upside break-even point is a closing underlying stock price (or index level) equalto the short call strike price plus the credit initially received for the spread. The downside break-even

point, on the other hand, is equal to the short put strike price less the credit received.

Upside break-even point = short call strike price + credit receivedDownside break-even point = short put strike price – credit received

Partial Profit At expiration, if the underlying stock (or index) closes at a point between the short put strike price andthe downside break-even point, or between the short call strike price and the upside break-even point,a partial profit would be seen.


Before expiration, an investor can take a profit or cut a loss by closing the spread if it has marketvalue. This involves selling the long call and put and buying the short call and put, which will be doneat a net debit, and these closing trades may be executed simultaneously in one spread transaction.

Profit or loss would simply be the net difference between the credit initially received for the spread and

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the debit paid at its closing.


An increase in volatility has a negative effect on the long iron condor; a decrease in volatility on theother hand has a positive effect.


Time decay has a positive effect on the long iron condor, and this effect increases at a faster rate asexpiration nears.

Iron Condor - Continued

Example





Long 1 XYZ June 70 callNet credit = $2.70 ($270 total)

Maximum ProfitThe maximum profit for this long iron condor spread is limited, and would be seen if the underlyingstock (or index) closes at or between the two middle strike prices of the short call and short put, or between $60 and $65, at expiration. In this case, the maximum profit would be equal to the $2.70credit initially received for the spread, or $270 total.

Maximum profit = $2.70 credit received, or $270 total

Maximum Loss At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55 (longput), or at or above the highest strike price of $70 (long call), the maximum loss for this long ironcondor would be limited to the $5.00 strike price differential – $2.70 credit initially received for thespread = $2.30, or $230 total.

Maximum loss = $5.00 strike differential – $2.70 credit received = $2.30, or $230 total

Break-Even Point At expiration, the upside break-even point for this long iron condor would be a closing underlying stockprice (or index level) equal to $65 (short call strike price) + $2.70 (credit received) = $67.70. Thedownside break-even point would be with the underlying stock (or index) closing at $60 (short putstrike price) – $2.70 (credit received) = $57.30.

Upside break-even point = $65 strike + $2.70 credit received = $67.70Downside break-even point = $60 strike – $2.70 credit received = $57.30

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Long XYZ June 55/60/65/70 Iron Condor Received $2.70 Net Credi t = $270 Total


XYZ Price

Long

55 PutValue

Short

60 PutValue

Short

65 CallValue

Long

70 CallValue

Value of

Spread

Spread

Profit/Loss*

75 0 0 – $1000 + $500 – $500 – $230

70 0 0 – $500 0 – $500 – $230

69 0 0 – $400 0 – $400 – $130

67.70 0 0 – $270 0 – $270 0

67 0 0 – $200 0 – $200 + $70

65 0 0 - 0 0 + $27062 0 0 - 0 0 + $270

60 0 0 - 0 0 + $270

58 0 – $200 - 0 – $200 + $70

57.30 0 – $270 - 0 – $270 0

56 0 – $400 - 0 – $400 – $130

55 0 – $500 - 0 – $500 – $230

50 + $500 – $1000 - 0 – $500 – $230


Assignment Risk


Equity OptionsFor an equity call option, early assignment usually occurs under specific circumstances; such as whenunderlying shareholders are about to be paid a dividend. Assignment at that time might be expected

when the dividend amount is greater than the time value in the calls premium, and notice of assignment may be received as late as the ex-dividend date.

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If a long iron condor holder is assigned early on the short call, then he must deliver underlying shares

by either exercising his long call if it is in-the-money, purchasing them in the marketplace (at a realizedloss), or by taking a short stock position. He would still retain the rest of the iron condor position.

For an equity put option, early assignment generally occurs when the short put is deep in-the-money,expiration is relatively near, and its premium has little or no time value. If a long iron condor holder isassigned early on the short put, he must buy underlying shares. Then he may exercise his long put, if

it is in-the-money, and sell those shares, or take a long stock position. He would still retain the rest of

the iron condor position.

American-Style Index OptionsIf early assignment is received on an in-the-money short call (or put) of a long iron condor spread, thecash settlement procedure for index options will create a debit in the investors brokerage accountequal to the cash settlement amount. This cash amount is determined at the end of the day the longcall (or put) is exercised by its owner.

After receiving assignment notification, usually the next business day, if his long call (or put) is alsoin-the-money the investor may exercise that contract. The cash settlement amount credited to hisaccount will be determined at the end of that day, and there is a full day’s market risk if the long optionis not sold during the trading day assignment is received. If the long call (or put) is not in-the-money,

after the cash settlement amount is debited from his account via assignment the investor would stillretain the rest of the iron condor position.

butterflies condors

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