Short put condor

Short Put Condor

Table of Contents

Basics Concepts – Short Put Condor

Description - Short Put Condor

  • The Short Put Condor is identical to the Short Call Condor except that it uses puts instead of calls.
  • The Short Put Condor involves a low strike short put, a lower middle OTM long put, a higher middle ITM long put, and a higher ITM short put.
  • The resulting position is profitable in the event of a big move by the stock.
  • Again, the problem is that the reward is seriously capped and is typically dwarfed by the potential risk if the stock fails to move.
  • Sell one lower strike (OTM) put.
  • Buy one lower middle strike (OTM) put.
  • Buy one higher middle strike (ITM) put.
  • Sell one higher strike (ITM) put.
  • All options share the same expiration date for this strategy.
  • For this strategy, you must use all calls.
  • Remember that there should be equal distance between each strike price.
  • The maximum risk occurs if the stock is at the middle strike at expiration.

Introduction to Short Put Condor

Outlook

  • With short condors, your outlook is direction neutral. You are looking for large volatility in the stock price, but you are not concerned with the direction.

Rationale

  • With short condors, you are looking to execute a limited yielding trade at a net credit, whereby your maximum profits occur if the stock finishes on either side of the upper and lower strike prices at expiration.
  • You are anticipating high volatility with the stock price, which will lead you to profit.

Net Position

  • This is a net credit trade.
  • Your maximum risk is the difference between the adjacent strike prices less the net credit.
  • Remember that the upper and lower strike prices are equidistant to the middle strike price.
  • Your maximum reward is the net credit you receive.

Effect of Time Decay

  • Time decay is generally harmful to your trade here because you are looking for a lot of movement in the stock price. After the position has become profitable, time decay becomes helpful.

Time Period to Trade

  • At least months out.

Breakeven Down = [Lower strike + net credit]

Breakeven Up = [Higher strike – net credit]

Steps to Trading a Short Put Condor

Steps In

  • Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern.

Steps Out

  • Manage your position according to the rules defined in your Trading Plan.
  • You can unravel the position just before expiration — remember to include all the commissions in your calculations.

Exiting the trade - Short Put Condor

Exiting the Position

  • With this strategy, you can simply unravel the spread by buying back the options you sold and selling the options you bought in the first place.
  • Advanced traders may leg up and down or only partially unravel the spread as the underlying asset fluctuates up and down.

Mitigating a Loss

  • Unravel the trade as described previously.
  • Advanced traders may choose to only partially unravel the spread leg-by-leg and create alternative risk profiles.

Advantages and Disadvantages

Advantages

  • Profit from a range bound stock with no capital outlay.
  • Capped risk .

Disadvantages

  • The higher profit potential comes with a wider range between the middle strikes.
  • The higher profit potential only comes nearer expiration.
  • The potential loss is far greater than the amount by which you can profit.
  • Bid/Ask Spread can adversely affect the quality of the trade.