If you expect the stock price to fluctuate greatly, but are unsure about the direction of the stock price fluctuation, and want to achieve profits at a low cost and with controlled risk under such circumstances, you can use Short Call Condor.

How to build

Short Call Condor consists of four options trades

● Sell 1 copy of Call1

● Buy 1 copy of Call2

● Buy 1 copy of Call3

● Sell 1 copy of Call4

The underlying assets and expiration dates for Call1, Call2, Call3, and Call4 are all the same. The differences are:

Exercise price: call1＜call2＜call3＜call4, call2-call1=call4-call3

Strategy brief

Short Call Condor. Generally, opening a position is to sell a real option call1 with a low interest price, buy a real option call2 with a medium to low trading price, buy an imaginary call3 with a medium to high trading price, and sell a fictitious option call3 with a high trading price.

The difference between the exercise price of the two real value calls is equal to the price difference between the two imaginary calls, and the spacing between the two exercise prices in the middle can be adjusted flexibly according to market conditions.

Of course, you can also directly select four equally spaced exercise prices. The underlying asset and maturity date of all options are the same.

In this strategy, selling call1 and call4 are the main trading positions to meet investors' expectations that “stock prices are expected to fluctuate greatly in the future”.

Buying call2 and call3 is mainly used to control the risk of selling call1 and call3.

Generally, when Short Call Condor, the option income obtained by selling call1 and call3 when opening a position will be higher than the option premium expenses for buying call2 and call3. Therefore, at the beginning of strategy construction, the strategy showed a net inflow on the book, and the cost of opening a position using this strategy was relatively low.

Furthermore, we can also calculate the strategy's maximum profit and loss at the beginning of strategy construction — Short Call Condor is a limited combination of profit and loss.

When the stock price is higher than the highest exercise price or lower than the minimum exercise price, the strategy generates the greatest return, which is the combined net option premium income.

When the stock price is between the two intermediate exercise prices, the strategy makes the biggest loss, subtracting the lower exercise price for the medium to low option price and then subtracting the net premium income.

It is important to note that this strategy requires trading 4 options, and 8 options at a time. The transaction cost is relatively high, and the actual cost needs to be calculated during actual use.

At the same time, the maximum profit of the strategy is the net option premium, so the price effectiveness of the option during the opening period is important to avoid a mismatch between the price of the option during the opening period and the value of the option that is unfavorable to itself.

Furthermore, a 4-leg option means that after opening a position, investors can flexibly adjust and change strategies according to market changes, such as changing to a 3-legged, 2-legged, or even 1-legged strategy.

Risks and benefits

● Break-even point

Low break-even point: stock price = low exercise price+net option premium

High break-even point: stock price = high exercise price - net option premium

● Maximum profit

Net option premium income

● Maximum loss

Maximum loss = medium to low exercise price - low exercise price - net option premium income

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 dollars. You think TUTU's stock price will fluctuate slightly in the next month, but you don't know the direction of fluctuation. If you want to achieve low cost and risk-controlled profits under this kind of expectation, you can use the hawk-style spread strategy of selling bullish options.

Sell 1 call at a price of 6 US dollars with an exercise price of 48 US dollars;

Buy 1 call with an exercise price of 50 US dollars at a price of 4 US dollars;

Buy 1 call with an exercise price of 54 US dollars at a price of 2 US dollars;

Sell 1 call with an exercise price of 56 US dollars at the price of 1 US dollar;

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.