The very center of PlayBird used to have a fine feathered centerfold, but then we...evolved.
The condor is the largest bird in North America, with the largest wing spread. Perhaps this is where a condor spread got its name in the world of options trading.
An option is when you predict that, in the future, a price will go up (calls) or down (puts). There are two kinds of options spreads: a long condor and a short condor. In a long condor, the investor hopes to profit from little to no movement of a security, while a short condor involves a lot of price movement and volatility. In both short and long scenarios, multiple options are purchased and sold at the same time. The goal is to reduce risk, but this can result in lower profits as well.
So here's what an investor would do in a long condor call spread after establishing four different strike prices (the price at which action to buy or sell takes place):
Buy a call with the lowest strike price.
Sell a call with the second lowest strike price.
Sell a call with the second highest strike price.
Buy a call with the highest strike price.
At the beginning, the stock price should be close to the middle of steps 2 and 3.
And here's how you would structure a short condor spread with four different strike prices:
Sell a call with the lowest strike price.
Buy a call with the second lowest strike price.
Buy a call with the second highest strike price.
Sell a call with the highest strike price.
The same scenarios would be followed for a long and short condor spread with puts. Keep in mind that each of these steps will involve transaction fees that could further eat into your profit.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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