The very center of PlayBird used to have a fine feathered centerfold, but then we...evolved.
The condor is the largest bird in North America, with the largest wing spread. Perhaps this is where a condor spread got its name in the world of options trading.
An option is when you predict that, in the future, a price will go up (calls) or down (puts). There are two kinds of options spreads: a long condor and a short condor. In a long condor, the investor hopes to profit from little to no movement of a security, while a short condor involves a lot of price movement and volatility. In both short and long scenarios, multiple options are purchased and sold at the same time. The goal is to reduce risk, but this can result in lower profits as well.
So here's what an investor would do in a long condor call spread after establishing four different strike prices (the price at which action to buy or sell takes place):
Buy a call with the lowest strike price.
Sell a call with the second lowest strike price.
Sell a call with the second highest strike price.
Buy a call with the highest strike price.
At the beginning, the stock price should be close to the middle of steps 2 and 3.
And here's how you would structure a short condor spread with four different strike prices:
Sell a call with the lowest strike price.
Buy a call with the second lowest strike price.
Buy a call with the second highest strike price.
Sell a call with the highest strike price.
The same scenarios would be followed for a long and short condor spread with puts. Keep in mind that each of these steps will involve transaction fees that could further eat into your profit.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...