Short-Condor
| Range | Value |
|---|---|
Market expectation | Rising volatility |
Construction | Call short with strike price E1 |
Profit potential | Limited |
Risk of loss | Limited |
Time effect | ? |
Volatility effect | Neutral |
Market expectation
The short condor is suitable if you expect strong price changes in the future, which is associated with increasing volatility. The current price of the underlying asset should lie between the intrinsic strike prices.
Construction
Calls with four different strike prices are required to construct a short condor with calls. You buy the two calls at the middle strike prices and sell the two calls at the outer strike prices.
You can also build up a short condor with puts, which leads to a similar profit and loss curve and therefore does not need to be described separately.
Profit potential
The profit potential is limited. The short condor has a maximum profit in the amount of the (net) premium received. You realize the maximum profit if the price of the underlying is below E1 or above E4 at maturity.
The lower break-even point is the sum of the lower base price E1 plus net premium expense, the upper break-even point at the upper base price E3 minus premium expense.
When considering the profit potential, you should bear in mind the high transaction costs, which have a decisive influence in practice, especially with small contract volumes.
Risk of loss
The risk of loss of the short butterfly is limited. The maximum loss arises if the price of the underlying asset is quoted between the strike prices E2 and E3 at maturity. It corresponds to the difference between the base prices E2 and E1 offset against the (net) premium for the position.
Time effect
If the price of the underlying does not change, there is a negative time value effect. The long calls are then "at-the-money" with a high time value loss, the other two are far "in-the-money" or far "out-of-the-money".
The time effect becomes slightly positive if the price is below E1 or above E4, as a call short is then "at-the-money" and its effect dominates.
Volatility effect
The volatility effect is neutral due to the design. However, rising volatility has a positive effect by increasing the probability of price changes.