Chapter 16Condor Spreads

If the butterfly spread from Chapter 15 made sense to you, the strategies in this chapter will, build upon those. Indeed, condor spreads are similar to butterflies with one important difference. In a typical fly, the investor is purchasing an option, selling two options at a different strike, and buying yet another option at a third strike, all within the same expiration term. The middle two options are the body of the butterfly, and the other two strikes are the wings.

By contrast, the condor is a four-legged options spread that involves the purchase of an option, the sale of another option at a different strike, the sale of a third option at a further strike, and finally, the purchase of another option at yet a different strike, all in the same expiration month. The middle two strikes are the body of the condor. The highest and lowest strikes are the wings.

Like the butterfly, the condor is an advanced play that can be considered a combination of vertical spreads covered in Chapters 12 and 13. For instance, a long call condor is a long call spread along with a short call spread at a higher strike. The last strategy in this text, the iron condor, is the combination of a short put spread and a short call spread. If this seems murky, don't fret. A couple of examples follow to illustrate.

Because four option legs are employed to implement these strategies, they can entail significant transaction costs, including multiple commissions, which will impact ...

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