THE CONDOR CORNER
THE CASE FOR THE CONDOR
We will be beginning a trading strategy that we hope several of you may come to use in the future. It is a strategy that requires 4 transaction legs, but is actually no more than a credit spread and a debit spread all with different strike prices.
This strategy offers its trader the opportunity to make a small Profit, with target prices based on expiration closes of the underlying. It is a strategy that can be rather effective, especially when you consider that the risk/reward ratio makes a lot of sense (cents).
This is a strategy that we will be adding in March, that we will use in an attempt to make a little profit but have the luxury of having a predetermined range where the Index or stock and the trading range can close and maximize that profit at expiration. This strategy is called the CONDOR Spread. When using the CONDOR trading strategy, we are placing this trade because we would like to make a profit by allowing the underlying Index to trade and close within a specified range. This profit can be obtained as long as the Index stays within our pre-calculated zone of profitability.
Let's look at a hypothetical example below:
Let's look at our hypothetical trade using real numbers from the QQQQ index and establish our condor spread as follows:
Scenario: We are using the QQQQ Index closing on at 43.68, based on the 2-22-08-market close)
The CONDOR SPREAD is based on four (4) transactions, which can be executed several ways, but will still achieve the same results if successful. In a nutshell the condor is nothing actually more than a credit and a debit spread together, which equal four (4) transactions.
In the following hypothetical example, we will place the following 4 trades using 10 contracts each (you may trade as many or as few as you desire, but remember the cost of transactions should be taken into consideration because of transaction charges for 4 trades.)
The CONDOR SPREAD (Exhibit A)
Now let's examine the risk/reward side of this trade by the use of the MATRIX chart below: We will show below examples of both a CONDOR CALL DEBIT SPREAD and a CONDOR PUT DEBIT SPREAD.
FIGURE 1: CONDOR CALL DEBIT SPREAD
The goal of the strategy is to have the underlying issue move slightly up (if a CONDOR CALL DEBIT SPREAD) or (slightly down if a CONDOR PUT DEBIT SPREAD
The maximum will be made if the underlying close anywhere between the two short strikes. It doesn't matter how close but anywhere between the two short strikes the profit maximizes out. So in the example above the maximum of $730 would be made if the QQQQ closes between $45 - $46 at expiration. The most that you could loss would be the $270, which is the cost of the trade if the QQQQ went south and the most you could lose if the QQQQ went over $47 or higher would be $270 (and the cost in commissions of closing all four of the positions out as all four would be in the money if the QQQQ closed anywhere over the price of $47.)
The Breakeven: There are two breakeven prices one on the high side and one on the low side. The breakeven is $44.27 on the low side and $46.73 on the high side. (Of course you need to consider commissions if you have to close out the on the high side, at less three (3) transactions)
The Goal: Is to have the underlying issue, in this case the QQQQ, close between $45-$46 to get the maximum profit of $730. Remember, however that you will still need to close out at least one position to be profitable and in many cases two or three of the positions. The key to maximizing the profit is for the underlying to close somewhere between the two short strikes at expiration and you get the maximum (less the commissions you have to pay to close out the positions that are in the money, which could be 1,2, or 3 depending on where the underlying closes. The only way you don't close out any positions if all four expire worthless and you loss the $270 (and your original commissions when you placed the CONDOR)
FIGURE 2: CONDOR PUT DEBIT SPREAD - The Downside Scenario
(Below is an example of the CONDOR PUT DEBIT SPREAD (the bearish scenario of the position that we mentioned above.) Same parameters as Call side, except this is the bearish scenario.
Here the maximum profit is $760 when the QQQQ closes between $42-$43.
BREAKEVEN: $43.76 on the high side and $41.24 breakeven on the downside
MAXIMUM LOSS: $240 (plus and commissions needed to close out in the money options.
The CONDOR is an excellent strategy that offers you a pre-defined range of profitability for being somewhere in the ballpark when the expiration date arrives.
NOTE: Because of the nature of the CONDOR spread, you have a minimum of 4 transactions; usually transacting a DEBIT CALL SPREAD and a CREDIT CALL SPREAD puts on these positions
THINGS TO CONSIDER REGARDING THE CONDOR SPREAD:
1. There are four legs, thus four (4) separate commission transactions:
Most Internet option trading firms make the condor trade easier to place than other brokerage firms. Some firms like optionxpress, brokerexpress, cybertrader, etc, have a matrix that allows you to put in all four parts of the condor for a NET DEBIT at once which makes life a lot easier. (In this case since this is a CONDOR DEBIT TRADE) (There are also CONDOR CREDIT spreads, which we will go into in later weeks.
RECOMMENDATIONS WILL BE STARTING SOON
We will offer a QQQQ, OEX or a DJX condor every month starting with March. This condor will be issued usually when there is 2-3 weeks left in the expiration month. on rare occasion we might choose a low beta and volatile stock issue as well. That decision will be made as the market so dictates. In addition, the type of spread, meaning DEBIT, CREDIT, PUT or CALL will be determined based on the monthly cash machines feel for market direction at that time. (In regards to CONDORS, the expression a CONDOR DEBIT SPREAD or CONDOR CREDIT SPREAD is based on where you have a NET DEBIT or NET CREDIT. The NET determines what type of CONDOR spread you call it.)
We will be talking more about this monthly trade as we head into the month of March. We may additionally decide to add SUPPLEMENTAL Condors for those who might have missed our entry point for the CONDOR, or might just want a few more plays. The SUPPLEMENT PLAY list would be just like our SUPPLEMENTAL MONTHLY CASH MACHINE SUPPLEMENTAL LIST, but would deal with CONDOR plays only.
We hope this will be another instrument to add to your investment arsenal.
Until Next Time,