Short Put Condor

 

Description

         

The Short Put Condor is identical to the Short Call Condor except that it uses puts instead of calls. It is the opposite of a Long Put Condor, which is a rangebound strategy. Short condors are not particularly popular because even though they produce a net credit, they offer very small returns compared to straddles and strangles with only slightly less risk.

 

The Short Put Condor involves a low strike short put, a lower middle out-of-the-money long put, a higher middle in-the-money long put, and a higher in-the-money 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.

 

Market Opinion

 

Directional neutral.

 

P/L

 

 

 

When To Use

 

Use this strategy when you want a capital gain. Use when you anticipate increased volatility in a stock price, in either direction.

 

Example

 

XXXX is trading at $52.87 on May 14, 2011.

Sell August 2011 45 strike put for $1.88.

Buy August 2011 50 strike put at $3.73.

Buy August 2011 55 strike put at $6.33.

Sell August 2011 60 strike put for $9.60.

 

Net credit: premiums sold minus premiums bought = $1.42.

 

Benefit

 

The benefit of this trade is that you do not have to put money down to possibly profit from a rangebound stock, with your risk capped.

 

Risk vs. Reward

 

The risk is the difference between adjacent strikes minus the net credit. The reward is the net credit you receive.

 

Net Upside

 

Net credit received.

 

Net Downside

 

Difference in adjacent strikes minus net credit.

 

Break Even Point

 

Break even up: highest strike minus net credit.

 

Break even down: lowest strike plus net credit.

 

Effect Of Volatility

 

Positive, unless the stock moves outside of the outer strikes.

 

Effect Of Time Decay

 

Negative. You have to wait to see a sizable movement in the stock.

 

Alternatives Before Expiration

 

To stem a loss, you can unravel the trade before expiration.

 

Alternatives After Expiration

 

Close out the spread by selling the options you bought and buying back the options you sold.