Butterflies Condors

Download What is a Spread?
Download: Butterflies and Condors

Basics of Spreading: Butterflies and Condors
What is a Spread?
Review the links below for detailed information.
Terms and Characterizations: Part 1
Terms & Characterizations: Part 2
Spread Order Execution
Calculating Profit & Loss
Early Assignment Risk
More on Terminology

The Strategies
The spreads discussed in this series, may be categorized with respect to their risk/reward profiles.
Profit limited & Loss limited
Moderately Bullish Moderately Bearish Neutral
Bull Call Spread X
Bear Call Spread X
Bear Put Spread X
Bull Put Spread X
Long Call Time Spread X
Long Put Time Spread X
Long Call Butterfly X
Long Put Butterfly X
Iron Butterfly X
Long Call Condor X
Long Put Condor X
Iron Condor X

Profit not limited & Loss limited
Very Bullish Very Bearish Neutral
Long Straddle X
Long Strangle X
Call Backspread X
Put Backspread X

Profit limited & Loss not limited
Neutral to slightly Bullish Neutral to slightly Bearish Neutral
Ratio Call Spread X
Ratio Put Spread X

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Short Straddle X
Short Strangle X
NOTE: For each spread example discussed in this class it is assumed that all transactions are opening
ones. In other words, an investor would initially have no position, but after making the transactions
described would have the spread position under discussion.
In order to simplify the computations, commissions and other costs have not been included in the
examples used in this course and may be significant. These costs will impact the outcome of all stock
and options transactions and must be considered prior to entering into any transactions. Investors
should consult their tax advisor about any potential tax consequences.
Long Call Butterfly
General Nature & Characteristics
The long call butterfly spread is made up entirely of call options on the same
underlying stock (or index). Its constructed by purchasing one call with a given
strike price, selling (writing) two calls with a higher strike price, and purchasing
one call with an even higher strike price. All calls have the same expiration month
, and the increment between strike prices is the same . The ratio of long to short
to long calls is always 1:2:1. The result is a position comprised of one long call
(lowest strike), two short calls (middle strike) and one long call (highest strike). An
investor with this position can be said to be long a call butterfly spread or to have bought a call
butterfly spread.
Long call butterfly =buy 1 lowest-strike call +sell 2 middle-strike calls +buy 1 highest-strike call
Debit vs. Credit
A long call butterfly spread will always be established at a net debit . In other words, the amount of
cash paid out for the two long calls (different strikes) is more than the cash received for the two written
calls (middle strike).
Long call butterfly =debit spread
Example
To establish a long call butterfly spread with XYZ options, an investor might buy 1 XYZ J une 55 call for
$6.00, sell (write) 2 XYZ J une 60 calls for $2.75 and buy 1 XYZ J une 65 call for $1.00. The result is the
investor being long 1 XYZ J une 55/60/65 call butterfly spread, at a $1.50 ($6.00 $5.50 +$1.00) net
debit.
XYZ June 55/60/65 Long Call Butterfly
Action Quoted Price* Total Price*
Buy 1 XYZ J une 55 call - $6.00 - $600.00
Sell 2 XYZ J une 60 calls +$2.75 x 2 +$550.00
Buy 1 XYZ J une 65 call - $1.00 - $100.00
Net Debit - $1.50 - $150.00
*Excluding commissions

Long 1 XYZ J une 55 call
Short 2 XYZ J une 60 calls
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Expectation
The long call butterfly spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize around the middle strike price of the short calls
until expiration. As well, the investor wants a decrease in option implied volatility that could enhance
profitability before expiration, perhaps with even more of a move in the underlying stock price (or index
level) than expected.
Long call butterfly: neutral
Motivation for Spreading
J ust as a straddle seller is neutral on the underlying stock, so is the holder of a long call butterfly. Both
investors expect the underlying stock (or index) to stabilize around a specific strike price, and to profit
from time decay as well as a possible decrease in volatility. By creating a long call butterfly spread,
however, an investor can avoid the up- and downside risk involved with a short straddle.
Long call butterfly: reduced (limited) risk

Risk vs. Reward
Maximum Profit
The maximum profit for a long call butterfly spread is limited. This profit will be seen if the underlying
stock (or index) closes at the middle strike price of the short calls at expiration. In this case, the
maximum profit is equal to the strike price differential (difference in strike prices) less the debit paid for
the butterfly.
Maximum profit =limited
(Underlying at middle strike at expiration)
Maximum Loss
The maximum loss for a long call butterfly spread is limited entirely to the net debit initially paid for it.
This loss will be seen if the underlying stock (or index) closes at or below the lowest strike price, or at
or above the highest strike price at expiration, no matter how high or low the underlying stock price (or
index level) moves.
Maximum loss =limited to debit paid
(Underlying at/below lowest strike or at/above highest strike at expiration)
Break-Even Point
There are two break-even points (BEPs) for a long call butterfly at expiration, one to the upside and
one to the downside. The upside break-even point is a closing underlying stock price (or index level)
equal to the highest strike price minus the debit initially paid for the spread. The downside break-even
point, on the other hand, is equal to the lowest strike price plus the debit paid.
Upside break-even point =highest strike price debit paid
Downside break-even point =lowest strike price +debit paid

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Partial Profit
At expiration, if the underlying stock (or index) closes at a point between the middle strike price, and
either the up- or downside break-even point, a partial profit would be seen.

Profit & Loss Before Expiration
Before expiration, an investor can take a profit or cut a loss by selling the spread if it has market value.
This involves selling the long calls and buying the short calls, which will be done at a net credit, and
these closing trades may be executed simultaneously in one spread transaction. Profit or loss would
simply be the net difference between the debit initially paid for the spread and the credit received at its
sale.
Effect of Volatility
An increase in volatility has a negative effect on the long call butterfly; a decrease in volatility on the
other hand has a positive effect.
Effect of Time Decay
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Time decay has a positive effect on the long call butterfly, and this effect increases at a faster rate as
expiration nears.
Long Call Butterfly - Continued
Example
Short 2 XYZ J une 60 calls
Net debit =$1.50 ($150 total)
Maximum Profit
The maximum profit for this long call butterfly spread is limited and would be seen if the underlying
stock (or index) closes at the middle strike price of the short calls, or $60, at expiration. In this case,
the maximum profit would be equal to the $5.00 difference in strike prices less the $1.50 debit paid for
the butterfly =$3.50 or $350 total.
Maximum profit =$5.00 strike difference $1.50 debit paid =$3.50, or $350 total
Maximum Loss
At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55, or at or
above the highest strike price of $65, the maximum loss for this long call butterfly would be limited to
the net $1.50 debit paid for the spread, or $150 total.
Maximum loss =$1.50 debit paid, or $150 total
Break-Even Point
At expiration, the upside break-even point for this long call butterfly would be a closing underlying
stock price (or index level) equal to $65 (highest strike price) $1.50 (debit paid) =$63.50. The
downside break-even point would be with the underlying stock (or index) closing at $55 (lowest strike
price) +$1.50 (debit paid) =$56.50.
Upside break-even point =$65 strike $1.50 debit paid =$63.50
Downside break-even point =$55 strike +$1.50 debit paid =$56.50

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Long XYZ June 55/60/65 Call Butterfly
Paid $1.50 Net Debit = $150 Total
Results at Expiration
XYZ Price
Long
55 Call
Value
Short 2
60 Calls
Value
Long
65 Call
Value
Value
of
Spread
Butterfly
Profit/Loss*
70 +$1500 $2000 +$500 0 $150
65 +$1000 $1000 0 0 $150
63.50 +$850 $700 0 +$150 0
62 +$700 $400 0 +$300 +$150
60 +$500 0 0 +$500 +$350
58 +$300 0 0 +$300 +$150
56.50 +$150 0 0 +$150 0
55 0 0 0 0 $150
50 0 0 0 0 $150

Assignment Risk
Assignment on any Equity option or American-style index option can, by contract terms, occur at any
time before expiration, although this generally occurs when the option is in-the-money.
Equity Options
For an equity call option, early assignment usually occurs under specific circumstances; such as when
underlying shareholders are about to be paid a dividend. Assignment at that time might be expected
when the dividend amount is greater than the time value in the calls premium, and notice of
assignment may be received as late as the ex-dividend date. If a long call butterfly spread holder is
assigned early on in-the-money short calls, then he may exercise as many long calls and buy shares
to fulfill the assignment obligation. If assigned on more short calls than in-the-money calls he is long,
then he must either purchase underlying shares for delivery to fulfill his assignment obligation, or take
a short position in those shares.
American-Style Index Options
If early assignment is received on in-the-money short calls of a long call butterfly spread, the cash
settlement procedure for index options will create a debit in the investors brokerage account equal to
the cash settlement amount. This cash amount is determined at the end of the day the long call is
exercised by its owner. After receiving assignment notification, usually the next business day, when the
investor exercises his long calls the cash settlement amount credited to his account will be determined
at the end of that day. There is a full days market risk if the long option is not sold during the trading
day assignment is received.
If assigned on more short calls than in-the-money calls he is long, the cash settlement procedure will
create a debit in the investors brokerage account equal to the cash settlement amount.
Long Put Butterfly
The long put butterfly spread is made up entirely of put options on the same
underlying stock (or index). Its constructed by purchasing one put with a given
strike price, selling (writing) two puts with a higher strike price, and purchasing
one put with an even higher strike price. All puts have the same expiration month
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, and the increment between strike prices is the same . The ratio of long to short
to long puts is always 1:2:1. The result is a position comprised of one long put
(lowest strike), two short puts (middle strike) and one long put (highest strike). An
investor with this position can be said to be long a put butterfly spread, or to have
bought a put butterfly spread.
Long put butterfly =buy 1 lowest-strike put +sell 2 middle-strike puts +buy 1 highest-strike put
Debit vs. Credit
A long put butterfly spread will always be established at a net debit . In other words, the amount of
cash paid out for the two long puts (different strikes) is more than the cash received for the two written
puts (middle strike).
Long put butterfly =debit spread
Example
To establish a long put butterfly spread with XYZ options, an investor might buy 1 XYZ J une 55 put for
$0.75, sell (write) 2 XYZ J une 60 puts for $2.75 and buy 1 XYZ J une 65 put for $5.75. The result is the
investor being long 1 XYZ J une 65/60/55 put butterfly spread, at a $1.00 ($0.75 $5.50 +$5.75) net
debit.

XYZ June 55/60/65 Long Put Butterfly
Buy 1 XYZ J une 55 put - $0.75 - $75.00
Sell 2 XYZ J une 60 putss +$2.75 x 2 +$550.00
Buy 1 XYZ J une 65 put - $5.75 - $575.00
Net Debit - $1.00 - $100.00

Long 1 XYZ J une 55 put
Short 2 XYZ J une 60 puts

Expectation
The long put butterfly spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize around the middle strike price of the short puts
until expiration. As well, the investor wants a decrease in option implied volatility that could enhance
profitability before expiration, perhaps with even more of a move in underlying stock price (or index
level) than expected.
Long put butterfly: neutral
J ust as a straddle seller is neutral on the underlying stock, so is the holder of a long put butterfly. Both
from time decay as well as a possible decrease in volatility. By creating a long put butterfly spread,
Long put butterfly: reduced (limited) risk
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Risk vs. Reward
Maximum Profit
The maximum profit for a long put butterfly spread is limited. This profit will be seen if the underlying
stock (or index) closes at the middle strike price of the short puts at expiration. In this case, the
maximum profit is equal to the strike price differential (difference in strike prices) less the debit paid for
the butterfly.
Maximum Loss
The maximum loss for a long put butterfly spread is limited entirely to the net debit initially paid for it.
index level) moves.
Break-Even Point
There are two break-even points (BEPs) for a long put butterfly at expiration, one to the upside and
equal to the highest strike price minus the debit initially paid for the spread. The downside break-even
point, on the other hand, is equal to the lowest strike price plus the debit paid.

Partial Profit

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Before expiration, an investor can take a profit or cut a loss by closing the spread. This involves selling
the long puts and buying the short puts, which will be done at a net credit, and these closing trades
may be executed simultaneously in one spread transaction. Profit or loss would simply be the net
difference between the debit initially paid for the spread and the credit received at its sale.
An increase in volatility has a negative effect on the long put butterfly; a decrease in volatility on the
Time decay has a positive effect on the long put butterfly, and this effect increases at a faster rate as
expiration nears.
Long Put Butterfly - Continued
Example
Short 2 XYZ J une 60 puts
Maximum Profit
The maximum profit for this long put butterfly spread is limited and would be seen if the underlying
stock (or index) closes at the middle strike price of the short puts, or $60, at expiration. In this case,
the maximum profit would be equal to the $5.00 difference in strike prices less the $1.00 debit paid for
the butterfly =$4.00 or $400 total.
Maximum Loss
above the highest strike price of $65, the maximum loss for this long put butterfly would be limited to
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Break-Even Point
At expiration, the upside break-even point for this long put butterfly would be a closing underlying stock
price (or index level) equal to $65 (highest strike price) $1.00 (debit paid) =$64.00. The downside
break-even point would be with the underlying stock (or index) closing at $55 (lowest strike price) +
$1.00 (debit paid) =$56.00.

Long XYZ June 55/60/65 Put Butterfly
XYZ Price
Long
55 Put
Value
Short 2
60 Puts
Value
Long
65 Put
Value
Value
of
Spread
Butterfly
Profit/Loss*
70 0 0 0 0 $100
65 0 0 0 0 $100
64 0 0 +$100 +$100 0
62 0 0 +$300 +$300 +$200
60 0 0 +$500 +$500 +$400
58 0 $400 +$700 +$300 +$200
56 0 $800 +$900 +$100 0
55 0 $1000 +$1000 0 $100
50 +$500 $2000 +$1500 0 $100

Assignment Risk
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Equity Options
For an equity put option, early assignment generally occurs when the short put is deep in-the-money,
expiration is relatively near, and its premium has little or no time value. If a long put butterfly spread
holder is assigned early on in-the-money short puts, then he may exercise as many long puts and sell
shares purchased via the assignment obligation. If assigned on more short puts than in-the-money
puts he is long, then he must purchase underlying shares.
If early assignment is received on in-the-money short puts of a long put butterfly spread, the cash
the cash settlement amount. This cash amount is determined at the end of the day the long put is
investor exercises his long puts the cash settlement amount credited to his account will be determined
If assigned on more short puts than in-the-money puts he is long, the cash settlement procedure will
Iron Butterfly
A long synthetic, or iron, butterfly spread is made up of both call options and
put options on the same underlying stock (or index). Its constructed by
purchasing one put with a given strike price, selling one call and one put with a
higher strike price, and purchasing one call with an even higher strike price. All
options have the same expiration month , and the increment between strike
prices is the same. The ratio of long put to short call & put to long call is always
1:2:1. The result is a position comprised of one long put (lowest strike), a short
call and a short put (middle strike) and one long call (highest strike). An investor with this position can
be said to be long (or hold) an iron butterfly spread, or long (hold) a synthetic butterfly spread.
Long iron butterfly =buy 1 lowest-strike put +sell 1 call & 1 put with middle-strike +buy 1 highest-
strike call
Note: There are two ways to view the composition of this iron butterfly spread. First, it is a short
straddle (short call & put with middle strike), with the downside protected by a long put (lowest strike)
and the upside protected by a long call (highest strike). Or second, it is constructed with two vertical
spreads: a bull put spread (long lowest-strike put and short middle-strike put) and a bear call spread
(long highest-strike call and short middle-strike call). Even though this spread is established at a net
credit, it may be considered long because the profit & loss profile resembles a long call or long put
butterfly.
Debit vs. Credit
A long iron butterfly spread constructed in the above manner will always be established at a net credit .
In other words, the amount of cash paid out for the two long options (call & put) is less than the cash
received for the two written options (call & put).
Long iron butterfly =credit spread
Example
To establish a long iron butterfly spread with XYZ options, an investor might buy 1 XYZ J une 55 put for
$0.75, sell (write) 1 XYZ J une 60 put for $2.50 and 1 XYZ J une 60 call for $2.80, and buy 1 XYZ J une
65 call for $1.00. The result is the investor being long 1 XYZ J une 55/60/65 iron butterfly spread, at a
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$3.55 ( $0.75 +$2.80 +$2.50 $1.00) net credit.

Long XYZ June 55/60/65 Iron Butterfly
Buy 1 XYZ J une 55 put $0.75 $75.00
Sell 1 XYZ J une 60 put +$2.50 +$250.00
Sell 1 XYZ J une 60 call +$2.80 +$280.00
Buy 1 XYZ J une 65 call $1.00 $100.00
Net Credit + $3.55 + $355.00

Short 1 XYZ J une 60 put
Short 1 XYZ J une 60 call

Expectation
The long iron butterfly spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize around the middle strike price of the short call
and put until expiration. As well, the investor wants a decrease in option implied volatility that could
enhance profitability before expiration, perhaps with even more of a move in the underlying stock price
(or index level) than expected.
Long iron butterfly: neutral
J ust as a straddle seller is neutral on the underlying stock, so is the holder of a long iron butterfly. Both
from time decay as well as a possible decrease in volatility. By creating a long iron butterfly spread,
Long iron butterfly: reduced (limited) risk

Risk vs. Reward
Maximum Profit
The maximum profit for a long iron butterfly spread is limited. This profit will be seen if the underlying
stock (or index) closes at the middle strike price of the short call and put at expiration. In this case, the
maximum profit is equal to the credit received when establishing the spread.
Maximum profit =limited to credit received
Maximum Loss
The maximum loss for a long iron butterfly spread is limited entirely to the strike price differential
(difference in strikes) less the credit initially received when the spread is established. This loss will be
seen if the underlying stock (or index) closes at or below the lowest strike price (long put), or at or
above the highest strike price at expiration (long call), no matter how high or low the underlying stock
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price (or index level) moves.
Maximum loss =limited to strike price differential credit received
Break-Even Point
There are two break-even points (BEPs) for a long iron butterfly at expiration, one to the upside and
equal to the middle strike price plus the credit initially received for the spread. The downside
break-even point, on the other hand, is equal to the middle strike price less the credit received.
Upside break-even point =middle strike price +credit received
Downside break-even point =middle strike price credit received

Partial Profit

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Before expiration, an investor can take a profit or cut a loss by closing the spread if it has market
value. This involves selling the long call and put and buying the short call and put, which will be done
at a net debit, and these closing trades may be executed simultaneously in one spread transaction.
Profit or loss would simply be the net difference between the credit initially received for the spread and
the debit paid at its closing.
An increase in volatility has a negative effect on the long iron butterfly; a decrease in volatility on the
Time decay has a positive effect on the long iron butterfly, and this effect increases at a faster rate as
expiration nears.
Iron Butterfly - Continued
Example
Net credit =$3.55 ($355 total)
Maximum Profit
The maximum profit for this long iron butterfly spread is limited, and would be seen if the underlying
stock (or index) closes at the middle strike price of the short call and short put, or $60, at expiration. In
this case, the maximum profit would be equal to the $3.55 credit initially received for the spread, or
$355 total.
Maximum profit =$3.55 credit received, or $355 total
Maximum Loss
At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55 (long
put), or at or above the highest strike price of $65 (long call), the maximum loss for this long iron
butterfly would be limited to the $5.00 strike price differential $3.55 credit initially received for the
spread =$1.45, or $145 total.
Maximum loss =$5.00 strike differential $3.55 credit received =$1.45, or $145 total
Break-Even Point
At expiration, the upside break-even point for this long iron butterfly would be a closing underlying
stock price (or index level) equal to $60 (middle strike price) +$3.55 (credit received) =$63.55. The
downside break-even point would be with the underlying stock (or index) closing at $60 (middle strike
price) $3.55 (credit received) =$56.45.
Upside break-even point =$60 strike +$3.55 debit paid =$63.55
Downside break-even point =$60 strike $3.55 debit paid =$56.45
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Received $3.55 Net Credit = $355 Total
XYZ Price
Long
55 Put
Value
Short
60 Put
Value
Short
60 Call
Value
Long
65 Call
Value
Value
of
Spread
Butterfly
Profit/Loss*
70 0 0 $1000 +$500 $500 $145
65 0 0 $500 0 $500 $145
63.55 0 0 $355 0 $355 0
62 0 0 $200 0 $200 +$155
60 0 0 0 0 0 +$355
58 0 $200 0 0 $200 +$155
56.45 0 $355 0 0 $355 0
55 0 $500 0 0 $500 $145
50 +$500 $1000 0 0 $500 $145

Assignment Risk
Equity Options
assignment may be received as late as the ex-dividend date.
If a long iron butterfly holder is assigned early on the short call, then he must deliver underlying shares
by either exercising his long call if it is in-the-money, purchasing them in the marketplace (at a realized
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loss), or by taking a short stock position. He would still retain the rest of the iron butterfly position.
expiration is relatively near, and its premium has little or no time value. If a long iron butterfly holder is
assigned early on the short put, he must buy underlying shares. Then, he may exercise his long put, if
it is in-the-money, and sell those shares, or take a long stock position. He would still retain the rest of
the iron butterfly position.
If early assignment is received on an in-the-money short call (or put) of a long iron butterfly spread, the
cash settlement procedure for index options will create a debit in the investors brokerage account
equal to the cash settlement amount. This cash amount is determined at the end of the day the long
call (or put) is exercised by its owner.
After receiving assignment notification, usually the next business day, if his long call (or put) is also
in-the-money the investor may exercise that contract. The cash settlement amount credited to his
account will be determined at the end of that day, and there is a full days market risk if the long option
is not sold during the trading day assignment is received. If the long call (or put) is not in-the-money,
after the cash settlement amount is debited from his account via assignment the investor would still
retain the rest of the iron butterfly position.
Long Call Condor
The long call condor spread is made up entirely of call options on the same
underlying stock (or index). Its constructed by purchasing one call with the
lowest strike price, selling (writing) a call with a higher strike price, selling
(writing) another call with an even higher strike price, and purchasing a call with
the highest strike price. All calls have the same expiration month , and the
increment between strike prices is the same. The ratio of long to short to short
to long calls is always 1:1:1:1 . The result is a position comprised of one long
call (lowest strike), two short calls (2 middle strike prices) and one long call (highest strike). An investor
with this position can be said to be long a call condor spread.
Long call condor =
buy 1 lowest-strike call +sell 1 higher-strike call +sell 1 even higher-strike call +buy 1 highest-strike
call
Note: One way to view a long call condor spread is as a long call butterfly with the two short calls one
strike price apart. For this reason you might see this spread referred to as a flat-top butterfly or an
elongated butterfly.
Debit vs. Credit
A long call condor spread will always be established at a net debit . In other words, the amount of cash
paid out for the two long calls (highest and lowest strikes) is more than the cash received for the two
written calls (middle strikes).
Long call condor =debit spread
Example
To establish a long call condor spread with XYZ options, an investor might buy 1 XYZ J une 55 call for
$7.90, sell 1 XYZ J une 60 call for $4.35, sell 1 XYZ J une 65 call for $1.85, and buy 1 XYZ J une 70 call
for $0.50.
The result is the investor being long 1 XYZ J une 55/60/65/70 call condor spread, at a $2.20 ( $7.90 +
$4.35 +$1.85 $0.50) net debit.

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Long XYZ June 55/60/65/70 Call Condor
Buy 1 XYZ J une 55 call - $7.90 - $790.00
Buy 1 XYZ J une 70 call - $0.50 - $50.00
Net Debit - $2.20 - $220.00


Expectation
The long call condor spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize between the two middle strike prices of the short
calls until expiration. As well, the investor wants a decrease in option implied volatility that could
enhance profitability before expiration, perhaps with even more of a move in the underlying stock price
Long call condor: neutral
J ust as a long call butterfly holder is neutral on the underlying stock, so is the holder of a long call
condor. The buyer of a call condor, however, can see maximum profit over a range of closing
underlying stock prices (or index levels) at expiration, instead of at a single strike price like the long
call butterfly holder.
Long call condor: increased chance of profitability

Risk vs. Reward
Maximum Profit
The maximum profit for a long call condor spread is limited. This profit will be seen if the underlying
stock (or index) closes at or between the two middle strike prices of the short calls at expiration. The
maximum profit amount is equal to the strike price differential (difference in strike prices) less the debit
paid for the condor.
(Underlying at/between 2 middle strikes at expiration)
Maximum Loss
The maximum loss for a long call condor spread is limited entirely to the net debit initially paid for it.
index level) moves.
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Break-Even Point
There are two break-even points (BEPs) for a long call condor at expiration, one to the upside and one
to the downside. The upside break-even point is a closing underlying stock price (or index level) equal
to the highest strike price minus the debit initially paid for the spread. The downside break-even point,
on the other hand, is equal to the lowest strike price plus the debit paid.
Partial Profit
At expiration, if the underlying stock (or index) closes at a point between the middle strike prices, and

This involves selling the long calls and buying the short calls, which will be done at a net credit, and
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sale.
An increase in volatility has a negative effect on the long call condor; a decrease in volatility on the
Time decay has a positive effect on the long call condor, and this effect increases at a faster rate as
expiration nears.
Long Call Condor - Continued
Example
Maximum Profit
The maximum profit for this long call condor spread is limited and would be seen if the underlying
stock (or index) closes at or between the two middle, short call strike prices of $60 and $65 at
expiration. The maximum profit amount is equal to the $5.00 strike price differential (difference in strike
prices) $2.20 debit paid for the condor =$2.80, or $280 total.
Maximum Loss
above the highest strike price of $70, the maximum loss for this long call condor would be limited to
Break-Even Point
At expiration, the upside break-even point for this long call condor would be a closing underlying stock
$2.20 (debit paid) =$57.20.

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XYZ Price
Long
55 Call
Value
Short
60 Call
Value
Short
65 Call
Value
Long
70 Call
Value
Value of
Spread
Spread
Profit/Loss*
75 +$2000 $1500 $1000 +$500 0 $220
70 +$1500 $1000 $500 0 0 $220
69 +$1400 $900 $400 0 +$100 $120
67.80 +$1280 $780 $280 0 +$220 0
67 +$1200 $700 $200 0 +$300 +$80
65 +$1000 $500 0 0 +$500 +$280
62 +$700 $200 0 0 +$500 +$280
60 +$500 0 0 0 +$500 +$280
58 +$300 0 0 0 +$300 +$80
57.20 +$220 0 0 0 +$220 0
56 +$100 0 0 0 +$100 $120
55 0 0 0 0 0 $220
50 0 0 0 0 0 $220

Assignment Risk
Equity Options
20 of 31
If a long call condor spread holder is assigned early on in-the-money short calls, then he may exercise
as many long calls and buy shares to fulfill the assignment obligation. If assigned on more short calls
than in-the-money calls he is long, then he must either purchase underlying shares for delivery to fulfill
his assignment obligation, or take a short position in those shares.
If early assignment is received on in-the-money short calls of a long call condor spread, the cash
the cash settlement amount. This cash amount is determined at the end of the day the long call is
investor exercises his long calls the cash settlement amount credited to his account will be determined
If assigned on more short calls than in-the-money calls he is long, the cash settlement procedure will
Long Put Condor
The long put condor spread is made up entirely of put options on the same
underlying stock (or index). Its constructed by purchasing one put with the
lowest strike price, selling (writing) a put with a higher strike price, selling
(writing) another put with an even higher strike price, and purchasing a put with
the highest strike price. All puts have the same expiration month , and the
increment between strike prices is the same . The ratio of long to short to short
to long puts is always 1:1:1:1 . The result is a position comprised of one long put (lowest strike), two
short puts (2 middle strike prices) and one long put (highest strike). An investor with this position can
be said to be long a put condor spread.
Long put condor =
buy 1 lowest-strike put +sell 1 higher-strike put +sell 1 even higher-strike put +buy 1 highest-strike
put
Note: One way to view a long put condor spread is as a long put butterfly with the two short puts one
strike price apart. For this reason, you might see this spread referred to as a flat-top butterfly or an
elongated butterfly.
Debit vs. Credit
A long put condor spread will always be established at a net debit . In other words, the amount of cash
paid out for the two long puts (highest and lowest strikes) is more than the cash received for the two
written puts (middle strikes).
Long put condor =debit spread
Example
To establish a long put condor spread with XYZ options, an investor might buy 1 XYZ J une 55 put for
$0.35, sell 1 XYZ J une 60 put for $1.75, sell 1 XYZ J une 65 put for $4.30, and buy 1 XYZ J une 70 put
for $8.00.
The result is the investor being long 1 XYZ J une 55/60/65/70 put condor spread, at a $2.30 ( $0.35 +
$1.75 +$4.30 $8.00) net debit.

Long XYZ June 55/60/65/70 Put Condor
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Buy 1 XYZ J une 55 put - $0.35 - $35.00
Sell 1 XYZ J une 60 put +$1.75 +$175.00
Sell 1 XYZ J une 65 put +$4.30 +$430.00
Buy 1 XYZ J une 70 put - $8.00 - $800.00
Net Debit - $2.30 - $230.00


Expectation
The long put condor spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize between the two middle strike prices of the short
puts until expiration. As well, the investor wants a decrease in option implied volatility that could
enhance profitability before expiration, perhaps with even more of a move in theunderlying stock price
Long put condor: neutral
J ust as a long put butterfly holder is neutral on the underlying stock, so is the holder of a long put
condor. The buyer of a put condor, however, can see maximum profit over a range of closing
underlying stock prices (or index levels) at expiration, instead of at a single strike price like the long put
butterfly holder.
Long put condor: increased chance of profitability

Risk vs. Reward
Maximum Profit
The maximum profit for a long put condor spread is limited. This profit will be seen if the underlying
stock (or index) closes at or between the two middle strike prices of the short puts at expiration. The
maximum profit amount is equal to the strike price differential (difference in strike prices) less the debit
paid for the condor.
Maximum Loss
The maximum loss for a long put condor spread is limited entirely to the net debit initially paid for it.
index level) moves.
22 of 31
Break-Even Point
There are two break-even points (BEPs) for a long put condor at expiration, one to the upside and one
to the highest strike price minus the debit initially paid for the spread. The downside break-even point,
on the other hand, is equal to the lowest strike price plus the debit paid.
Partial Profit
At expiration, if the underlying stock (or index) closes at a point between the middle strike prices, and

This involves selling the long puts and buying the short puts, which will be done at a net credit, and
sale.
23 of 31
An increase in volatility has a negative effect on the long put condor; a decrease in volatility on the
Time decay has a positive effect on the long put condor, and this effect increases at a faster rate as
expiration nears.
Long Put Condor - Continued
Example
Maximum Profit
The maximum profit for this long put condor spread is limited and would be seen if the underlying stock
(or index) closes at or between the two middle, short put strike prices of $60 and $65 at expiration. The
maximum profit amount is equal to the $5.00 strike price differential (difference in strike prices) $2.30
debit paid for the condor =$2.70, or $270 total.
Maximum Loss
above the highest strike price of $70, the maximum loss for this long put condor would be limited to the
net $2.30 debit paid for the spread, or $230 total.
Break-Even Point
At expiration, the upside break-even point for this long put condor would be a closing underlying stock
$2.30 (debit paid) =$57.30.

24 of 31

XYZ Price
Long
55 Put
Value
Short
60 Put
Value
Short
65 Put
Value
Long
70 Put
Value
Value of
Spread
Spread
Profit/Loss*
75 0 0 0 0 0 $230
70 0 0 0 0 0 $230
69 0 0 0 +$100 +$100 $130
67.70 0 0 0 +$230 +$230 0
67 0 0 0 +$300 +$300 +$70
65 0 0 0 +$500 +$500 +$270
62 0 0 $300 +$800 +$500 +$270
60 0 0 $500 +$1000 +$500 +$270
58 0 $200 $700 +$1200 +$300 +$70
57.30 0 $270 $770 +$1270 +$230 0
56 0 $400 $900 +$1400 +$100 $130
55 0 $500 $1000 +$1500 0 $230
50 +$500 $1000 $1500 +$2000 0 $230

Assignment Risk
Equity Options
expiration is relatively near, and its premium has little or no time value. If a long put condor spread
holder is assigned early on in-the-money short puts, then he may exercise as many long puts and sell
25 of 31
shares purchased via the assignment obligation. If assigned on more short puts than in-the-money
puts he is long, then he must purchase underlying shares.
If early assignment is received on in-the-money short puts of a long put condor spread, the cash
the cash settlement amount. This cash amount is determined at the end of the day the long put is
investor exercises his long puts the cash settlement amount credited to his account will be determined
If assigned on more short puts than in-the-money puts he is long, the cash settlement procedure will
Iron Condor
A long synthetic, or iron, condor spread is made up of both call options and put
options on the same underlying stock (or index). Its constructed by purchasing one
put with the lowest strike price, selling one put with a higher strike price, selling one
call with an even higher strike price, and purchasing one call with the highest strike
price. All options have the same expiration month , and the increment between
strike prices is the same . The ratio of long put to short put to short call to long call
is always 1:1:1:1 . The result is a position comprised of a long put (lowest strike), a
short put (higher strike), a short call (even higher strike) and one long call (highest
strike). An investor with this position can be said to be long (or hold) an iron condor spread, or long
(hold) a synthetic condor spread.
Long iron condor =
buy 1 lowest-strike put +sell 1 higher-strike put +sell 1 even higher-strike call +buy 1 highest-strike
call
Note: There are two ways to view the composition of this iron condor spread. First, it is a short
strangle (short call & put with two middle strikes), with the downside protected by a long put (lowest
strike) and the upside protected by a long call (highest strike). Or second, it is constructed with two
vertical spreads: a bull put spread (long lowest-strike put and short higher-strike put) and a bear call
spread (long highest-strike call and short lower-strike call). Even though this spread is established at a
net credit, it may be considered long because the profit & loss profile resembles a long call or long
put condor.
Debit vs. Credit
A long iron condor spread constructed in the above manner will always be established at a net credit .
In other words, the amount of cash paid out for the two long options (call & put) is less than the cash
received for the two written options (call & put).
Long iron condor =credit spread
Example
To establish a long iron condor spread with XYZ options, an investor might buy 1 XYZ J une 55 put for
$0.35, sell (write) 1 XYZ J une 60 put for $1.75, sell (write) 1 XYZ J une 65 call for $1.80, and buy 1
XYZ J une 70 call for $0.50. The result is the investor being long 1 XYZ J une 55/60/65/70 iron condor
spread, at a $2.70 ( $0.35 +$1.75 +$1.80 $0.50) net credit.

Long XYZ June 55/60/65/70 Iron Condor
26 of 31
Buy 1 XYZ J une 55 put $0.35 $35.00
Sell 1 XYZ J une 60 put +$1.75 +$175.00
Buy 1 XYZ J une 70 call $0.50 $50.00
Net Credit +$2.70 +$270.00


Expectation
The long iron condor spread is a neutral position. An investor employing this strategy is neutral on the
underlying stock (or index), and expects it to stabilize between the middle two strike prices of the short
put and short call until expiration. As well, the investor wants a decrease in option implied volatility that
could enhance profitability before expiration, perhaps with even more of a move in the underlying stock
price (or index level) than expected.
Long iron condor: neutral
J ust as a long call or put butterfly holder is neutral on the underlying stock, so is the holder of a long
iron condor. The holder of a long iron condor, however, can see maximum profit over a range of
closing underlying stock prices (or index levels) at expiration, instead of at a single strike price like the
long butterfly holder.
Long iron condor: increased chance of profitability

Risk vs. Reward
Maximum Profit
The maximum profit for a long iron condor spread is limited. This profit will be seen if the underlying
stock (or index) closes at or between the middle strike prices of the short call and put at expiration. In
this case, the maximum profit is equal to the credit received when establishing the spread.
Maximum Loss
The maximum loss for a long iron condor spread is limited entirely to the strike price differential
(difference in strikes) less the credit initially received when the spread is established. This loss will be
seen if the underlying stock (or index) closes at or below the lowest strike price (long put), or at or
above the highest strike price at expiration (long call), no matter how high or low the underlying stock
price (or index level) moves.
Maximum loss =limited to strike price differential credit received
27 of 31
Break-Even Point
There are two break-even points (BEPs) for a long iron condor at expiration, one to the upside and one
to the short call strike price plus the credit initially received for the spread. The downside break-even
point, on the other hand, is equal to the short put strike price less the credit received.
Upside break-even point =short call strike price +credit received
Downside break-even point =short put strike price credit received
Partial Profit
At expiration, if the underlying stock (or index) closes at a point between the short put strike price and
the downside break-even point, or between the short call strike price and the upside break-even point,
a partial profit would be seen.

Before expiration, an investor can take a profit or cut a loss by closing the spread if it has market
value. This involves selling the long call and put and buying the short call and put, which will be done
at a net debit, and these closing trades may be executed simultaneously in one spread transaction.
Profit or loss would simply be the net difference between the credit initially received for the spread and
28 of 31
the debit paid at its closing.
An increase in volatility has a negative effect on the long iron condor; a decrease in volatility on the
Time decay has a positive effect on the long iron condor, and this effect increases at a faster rate as
expiration nears.
Iron Condor - Continued
Example
Net credit =$2.70 ($270 total)
Maximum Profit
The maximum profit for this long iron condor spread is limited, and would be seen if the underlying
stock (or index) closes at or between the two middle strike prices of the short call and short put, or
between $60 and $65, at expiration. In this case, the maximum profit would be equal to the $2.70
credit initially received for the spread, or $270 total.
Maximum profit =$2.70 credit received, or $270 total
Maximum Loss
At expiration, if the underlying stock (or index) closes at or below the lowest strike price of $55 (long
put), or at or above the highest strike price of $70 (long call), the maximum loss for this long iron
condor would be limited to the $5.00 strike price differential $2.70 credit initially received for the
spread =$2.30, or $230 total.
Maximum loss =$5.00 strike differential $2.70 credit received =$2.30, or $230 total
Break-Even Point
At expiration, the upside break-even point for this long iron condor would be a closing underlying stock
price (or index level) equal to $65 (short call strike price) +$2.70 (credit received) =$67.70. The
downside break-even point would be with the underlying stock (or index) closing at $60 (short put
strike price) $2.70 (credit received) =$57.30.
Upside break-even point =$65 strike +$2.70 credit received =$67.70
Downside break-even point =$60 strike $2.70 credit received =$57.30

29 of 31

Received $2.70 Net Credit = $270 Total
XYZ Price
Long
55 Put
Value
Short
60 Put
Value
Short
65 Call
Value
Long
70 Call
Value
Value of
Spread
Spread
Profit/Loss*
75 0 0 $1000 +$500 $500 $230
70 0 0 $500 0 $500 $230
69 0 0 $400 0 $400 $130
67.70 0 0 $270 0 $270 0
67 0 0 $200 0 $200 +$70
65 0 0 - 0 0 +$270
62 0 0 - 0 0 +$270
60 0 0 - 0 0 +$270
58 0 $200 - 0 $200 +$70
57.30 0 $270 - 0 $270 0
56 0 $400 - 0 $400 $130
55 0 $500 - 0 $500 $230
50 +$500 $1000 - 0 $500 $230

Assignment Risk
Equity Options
30 of 31
If a long iron condor holder is assigned early on the short call, then he must deliver underlying shares
by either exercising his long call if it is in-the-money, purchasing them in the marketplace (at a realized
loss), or by taking a short stock position. He would still retain the rest of the iron condor position.
expiration is relatively near, and its premium has little or no time value. If a long iron condor holder is
assigned early on the short put, he must buy underlying shares. Then he may exercise his long put, if
it is in-the-money, and sell those shares, or take a long stock position. He would still retain the rest of
the iron condor position.
If early assignment is received on an in-the-money short call (or put) of a long iron condor spread, the
cash settlement procedure for index options will create a debit in the investors brokerage account
equal to the cash settlement amount. This cash amount is determined at the end of the day the long
call (or put) is exercised by its owner.
After receiving assignment notification, usually the next business day, if his long call (or put) is also
in-the-money the investor may exercise that contract. The cash settlement amount credited to his
account will be determined at the end of that day, and there is a full days market risk if the long option
is not sold during the trading day assignment is received. If the long call (or put) is not in-the-money,
after the cash settlement amount is debited from his account via assignment the investor would still
retain the rest of the iron condor position.
31 of 31

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