Condor
The condor is a neutral strategy with limited risk and limited rewards.
How it works: The investor takes the body of the butterfly, which has two options at the middle
strike price, and splits it over two middle strike prices. That makes it a butterfly stretched
over four strike prices rather than three strike prices. The strategy works best in a stagnant
market.
You find a stock that's been trading flat, one in which you see little immediate movement.
Example: You are watching a stock that's traded consistent around $75. You would A) sell one $75
call at $6, B) sell one $80 call at $4, C) buy one $70 call for $9, and D) buy one $85 call for
$2. Based on one contract, you would have $1,000 in credit for selling the two calls and a $1,100
debit for buying the two calls, leaving a $100 debit.
The payoff: The biggest profits come if the stock stays between $75 and $80. At $75, the $70 call
would be worth $500, the others would expire worthless, and your profit would be $400. Any price
above $85 or below $70 would leave the maximum loss of $100.
The drawback: A lot of commissions are required to complete the trade.
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