Just like how the strangle had a wider range than a straddle, condors can be thought of as “wider” butterflies. The rational for entering condor trades are the same as that of butterflies. The number of options that you trade are the same, except that the middle is now composed of 2 strikes instead of one.
Long Call Condor
Say you are neutral on the underlying and expect it to stabilize between a range of prices, then a Long Call Condor can be preferable over a Long Call Butterfly.
For example, with the Nifty trading at 6780, instead of doing an April 6700/6750/6800 Long Call Butterfly, you could do an April 6700/6750/6800/6850 Long Call Condor. If the Nifty ends between 6721.85 and 6828.15 at expiry, you make a profit of Rs. 1407.50 and your downside (max loss) is limited to the premium you paid (Rs. 1092.50). Note how the range of the Condor is wider [6721.85, 6828.15] vs. [6712.00, 6788.00] and the max profit is lower Rs. 1407.50 vs. Rs. 1900.00 when compared to the butterfly.
θ: helpful when the position is profitable
δ: greatest around the outer strikes, zero around the middle strikes
κ: volatility is unhelpful, unless the underlying moves outside the outer strikes
γ: peaks negatively around the middle strike and positively around the outside strikes
Short call condor
A short call condor can be used instead of a short call butterfly to speculate on increasing volatility.
For example, with the Nifty trading at 6780, instead of doing an April 6700/6750/6800 Short Call Butterfly, you could do an April 6700/6750/6800/6850 Short Call Condor. You might even end up collecting more premium than the butterfly. If the Nifty ends outside of 6721.85 and 6828.15 at expiry, you make a profit of Rs. 1092.50 and your downside (max loss) is Rs. 1407.50. Note how the range of the Condor is wider – [6721.85, 6828.15] vs. [6712.00, 6788.00] – and the max profit is higher – Rs. 1092.50 vs. Rs. 600.00 – when compared to the butterfly.
You should know the historical volatility of the underlying and its distribution before you get into volatility trades. As a rule of thumb, always try to position your derivative book towards being long volatility.
If the bid/ask spread is too wide, it can affect the quality of the trade. Since the losses are capped, running this trade to expiry may be tempting in such a scenario.