Bull Condor Spread is a simple options trading strategy used by beginners. This strategy is used during a Bull market conditions.
Know everything about this options strategy here.
About Bull Condor Spread
A Bull Condor spread is an options trading strategy used by the traders when they have a bullish outlook for the underlying security.
The difference between a Bull Condor spread and other trading strategies is the number of potential profits.
In most trading strategies, your profits are limited to a certain extent, even if the market outperforms.
But in the case of Bull Condor spread, if you analyse the underlying security and the security rises to your selected strike price range, you can earn substantial returns from the same.
A Bull Condor spread might look like a bull butterfly spread, but it does not require the same level of accuracy.
The only condition to earn profits using this strategy is to create a debit spread using a range of strike prices within which you feel the underlying security would trade.
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When to use a Bull Condor Spread?
As discussed earlier, Bull Condor spread is an options trading strategy that the traders use when they have a bullish outlook towards the market.
The key to making profits in a Bull Condor spread is a thorough analysis of the underlying security and choosing an accurate range of strike prices.
If you are confident that the underlying security is going to trade within a specified range in the future, you can use a Bull Condor spread.
Implementing a Bull Condor spread helps you in reducing the upfront cost and earning high returns when the security reaches your expected range.
In such scenarios, you can use either of the two strategies, which are bull butterfly spread or a Bull Condor spread.
If you are confident about a specific strike price, then you should go for a bull butterfly spread. But if you are targeting a specific range, Bull Condor spread can help you earn higher profits.
Find out other Bull Option Trading Strategy here
|Long Call||Bull Put Spread||Bull Butterfly Spread|
|Bull Call Ladder Spread||Bull Ratio Spread||Short Put|
|Bull Call Spread||Short Bull Ratio Spread|
How a Bull Condor Spread works?
Application of a Bull Condor spread can be a very complex thing to do. Therefore, we do not recommend this strategy to beginners.
The first thing you need to do before applying a Bull Condor spread is to analyze the underlying security thoroughly.
Once you have done that, you need to choose the strike price range between which you expect the security to rise and choose the expiry date accordingly.
The strike price is the target price at which you feel the security will rise, and the date of expiry is the date at which the option contract will expire.
To implement a Bull Condor spread, you need to buy as well as write options. There are two ways to do so. The first one is making all the four transactions in one go for the ease of implementation.
Otherwise, you can enter each transaction individually, which can help you earn more, but it requires perfect entry and exit.
Let’s take a few examples for a better understanding of the strategy:
ABC Stock is trading at: 60 rupees, Lot size: 100
Expected price range: 65-67 rupees
To apply a Bull Condor spread, you need to execute the following transaction:
- Write calls for ABC with 65 CE for 4.5 INR/lot (Premium Received: 450)
- Write calls for ABC with 67 CE for 2.5 INR/lot (Premium Received: 250)
- Buy calls for ABC with 63 CE for 8.5 INR/lot. (Premium paid: 850)
- Buy calls for ABC with 69 CE for 2 INR/lot (Premium paid: 200)
Calculating the net credit/debit for the above: 450+250-850-200= -350 debit spread
This means the net amount paid for executing the Bull Condor spread is 350 rupees, and this is the most you can lose.
The trader gets to earn maximum profits when the security trades between the strike prices for which calls have been sold. In this case, we have sold the calls with strike prices 65 and 67.
Therefore, to earn maximum profits, the security should trade between 65 to 67 at the time of expiry.
Case 1: ABC Stock price increases to 65 by the time of expiry
In this case, the call we bought with a strike price 63CE will become in the money and would probably rise to a premium of 20 rupees.
On the other hand, all the calls would become either At the Money or Out of the money and expire worthless.
Net Gain: 20*100 – 3.5*100= 2000-350= 1650 rupees
Case 2: ABC Stock price increases to 66 by the time of expiry
In this case, the call we bought with a strike price 63CE will become in the money, and would probably rise to a premium of 30 rupees.
The call with strike price 55CE will become ITM, and the premium would rise to 10 rupees creating a liability. The remaining contracts would expire worthless.
Net Gain: 30*100 – 3.5*100 – 10*100= 3000-350-1000= 1650 rupees
Case 3: ABC Stock price increases to 67 by the time of expiry
In this case, the call we bought with a strike price 63CE will become in the money and would probably rise to a premium of 40 rupees.
The call with strike price 55CE will become ITM, and the premium would rise to 20 rupees creating a liability. The remaining contracts would expire worthless.
Net Gain: 40*100 – 3.5*100 – 20*100= 4000-350-2000= 1650 rupees
As we saw in the above cases, the expected price range for the security was 65 to 67. If this happens, the trader will be able to earn potential profits of 1650 rupees.
But, if the security does not increase at all or increases too much, the trader will have to bear the loss of initial investment, which means the value of the debit spread.
This happens because when the value of the security rises significantly, the premium of calls written also increases substantially, the premium of calls bought cannot meet up the liability.
How to minimize risk while using a long call strategy?
The only strategy to minimize losses, in this case, would be to choose the strike price range correctly.
You need not choose a specific target price, but predicting an expected strike price range can help in earning profits.
On the other hand, the profits and losses can be controlled by the difference between the strike prices.
If the range of strike prices is narrow, there would be more earnings and a higher level of risk associated. On the other hand, a wider range would provide lesser profits but minimize risk too.
Advantages of the strategy:
- If the trader can analyze the strike price correctly, the returns can be maximized.
- The upfront cost of applying the Bull Condor spread is low.
- The trader can choose the range of strike prices according to the level of profits they want to earn and the amount of risk they can bear.
Disadvantages of the strategy:
- The implementation requires thorough analysis and trading experience. Therefore, beginners should avoid using it.
Conclusion: Bull Condor
If you feel that the underlying security is going to trade at a range in the future, you can use this strategy. If the expected range turns accurate, the traders can maximize their returns.
Although the strategy requires multiple transactions and executing them all at the same time can be a tedious task.
Beginners should avoid using this strategy due to its complex nature and the level of expertise required for its implementation.
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