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A market can move higher, lower or sideways. Stock traders profit in bullish markets by going long stock, and they can enter short trades in a bearish market. However, during sideways markets, stock traders get frustrated as they have a tough time garnering profits.

Options traders don't share that problem, mainly because they have several strategies that profit from sideways trading markets. The one we'll focus on today is the "condor."

You might not be familiar with a condor, but it's the twin brother of the butterfly. A condor is a neutral strategy that takes advantage of no net movement in a stock. Much like a butterfly, a condor consists of wings and a body.

Start by trying to find a stock that has a trading range. From there, you'd use four strike prices that coincide with this range. For example, if XYZ stock were trading in a range from about $12 to $16, you could enter a condor using the 10, 12.50, 15 and 17.50 strikes. Here's how:

The wings of the condor -- in this case, the 10 and 17.50 strikes -- would be bought. The body -- the 12.50 and 15 strikes -- would be sold. This would create a condor that profits if XYZ stock stays in its range. The maximum profit is achieved if XYZ closed at expiration in between the two middle strikes. So if XYZ were to close anywhere between 12.50 and 15 at expiration, you'd get maximum profit.

Now, let's figure the maximum profit, assuming the following data for this example:

  • XYZ stock trades at $14
  • Sept. 10 call bought at $4.20
  • Sept. 12.50 call sold at $2.25
  • Sept. 15 call sold at $1.10
  • Sept. 17.50 call bought at 15 cents

By purchasing the wings, you would spend $4.35. By selling the body, you'd receive $3.35. This means that your total debit for this trade would be $1, or $100 per condor entered. Your maximum risk is this debit, but you also have larger commission costs because of the number of strikes you're using.

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The maximum profit is the difference between the middle strikes less the debit. So the spread between 12.50 and 15 is $2.50, minus the $1 you paid, leaving you with $1.50. Therefore, your maximum risk is $100 and your maximum profit is $150.

You can find the break-even points by adding the debit to the lower strike price and subtracting it from the higher. In this example, your break-even points come at 11 (10 strike plus 1 debit) and 16.50 (17.50 strike minus 1 debit). If the stock closes on expiration outside the wings, your maximum loss would occur.

How does a condor compare to a butterfly? A butterfly also has wings and a body, but the body consists of just one strike price. In a butterfly, you'd sell twice as many contracts for the body as the wings but at just one strike price. Therefore, a stock that is trading in the range of $10 to $20 could be traded by entering a butterfly using the 10, 15 and 20 strikes.

I like condors more than butterflies because a condor has a bigger maximum profit range. In a butterfly, the maximum profit is achieved only if the stock closes right at the middle strike on expiration.

To enter a condor, you usually want to use the front-month options because you benefit as time value erodes and you don't want to give the stock too much time to leave its trading range. That said, you often may need to go out one month further to get a decent profit. For example, it's just 2 1/2 weeks until September expiration. It may be tough to find a decent profit using September options, so moving out to October may be necessary.

Another common question is whether to use puts or calls. In a condor, it doesn't matter which are used, so look at both to see which offers the best risk/reward ratio.

By Joel Addison, staff writer and options strategist at Visit

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