An albatross spread is a four-leg options strategy that works like a condor spread with the middle strikes set farther apart. A long albatross (net debit) profits when the stock stays inside a wide price range at expiration. A short albatross (net credit) profits when the stock moves far enough up or down to leave that range. Both versions have limited profit and limited risk, and both suit traders with intermediate to advanced options experience rather than beginners.
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Short albatross strategy
A short albatross is a volatility strategy used when an investor expects a large move in the stock, either up or down. It is similar to a short condor spread but with wider differences between the two middle strike prices. Since there is a wider difference between the strike prices, the stock price has to move farther to profit.
For a call short albatross, the investor:
Buys:
- One ITM (in the money) call option
- One OTM (out of the money) call option
Sells:
- One deep ITM call option (lowest strike)
- One far OTM call option (highest strike)
Maximum gain is the net premium received. Maximum loss is the difference between the two lowest strikes minus the net premium received.
Using MarketXLS
MarketXLS provides a Short Albatross Strategy template that calculates everything for users once they input their desired stock and strike prices in the yellow cells. In the example image above, we have chosen to do a call albatross option, and our current share price is $245.7. The Deep ITM strike price is supposed to be more than $10 less than the current price. Therefore we chose 225 and the ITM strike price as 240. The Far OTM strike price is supposed to be more than $10 added from the current strike price. Therefore we chose 265. For lower-priced stocks, the Deep ITM price and Far OTM price can be $5 or less. The further away from the OTM you choose, the cheaper it gets because it is less likely for a stock’s price to rise that high. Also, the further away you choose the two buying strike prices, the lower the risk.
Net credit is the premium from the two options sold minus the premium paid for the two options bought, multiplied by 100:
(21.93 + 0.29 - 8.65 - 2.9) x 100 = 10.67 x 100 = $1,067 per position
Short Albatross strategy has two break-even points: upper and lower.
Upper break-even = Highest Strike Price – Net Credit
Lower break-even = Lowest Strike Price + Net Credit
Long albatross strategy
A long albatross is a long condor spread with the two short legs written farther apart, so it covers a wider range of prices than a condor. A long albatross strategy is best implemented when you expect the underlying asset’s price to be within a wide price range (range-bound). Again investors have a choice of trading a call albatross spread or a put albatross spread. They are both rewarding as long as the stock price stays within the defined price range.
For a call long albatross, the investor:
Buys:
- One far ITM call option (lowest strike)
- One far OTM call option (highest strike)
Sells:
- One ITM call option
- One OTM call option
Maximum loss is the net debit paid to enter the position. Maximum gain is the difference between the two lowest strikes minus the net debit.
Using MarketXLS
MarketXLS provides a Long Albatross Strategy template that calculates everything for users once they input their desired stock and strike prices in the yellow cells. In the example above, we have chosen to do a call albatross option, and our current share price is $245.7. We chose 225 for the Deep ITM strike price and the ITM strike price as 240. We chose 265 for the Far OTM strike price. The further away from the OTM you choose, the cheaper it gets because it is less likely for a stock’s price to rise that high. Also, the further away you choose the two buying strike prices, the lower the risk.
We expect Microsoft to trade between $225 and $265 on expiration and gain max profit between $240 and $260. Deciding which two strike prices to go short in depends on how wide you want your range for maximum possible profit.
The net debit is $1,383 per position. Net debit is the premium paid for the two options bought minus the premium from the two options sold, multiplied by 100:
(21.55 + 0.09 - 7.5 - 0.31) x 100 = 13.83 x 100 = 1,383
With strikes of 225 and 240 on the lower side, maximum gain is (240 - 225 - 13.83) x 100 = $117 and maximum loss is the $1,383 debit.
The long albatross strategy also has two break-even points: upper and lower.
Upper break-even = Highest Strike Price – Net Debit
Lower break-even = Lowest Strike Price + Net Debit
The Bottom Line
A long albatross profits when the stock stays within a wide price range, while a short albatross profits when the stock moves outside that range. This article is educational and is not investment advice.
