Long
Put Condor
Description
The
Long Put Condor is another rangebound strategy and is the opposite of a Short
Put Condor, which is a volatility strategy. Long condors are quite popular
because they offer a good risk/reward ratio, together with low cost. The long
options at the outside strikes ensure that the risk is capped on both sides,
and this is a much more conservative strategy than the Short Strangle.
The
Long Put Condor involves a low strike long put, a lower middle OTM Short Put, a
higher middle ITM Short Put, and a higher ITM Long Put. The resulting position
yields a position that is profitable in the event of the stock remaining
rangebound. Here the risk/reward ratio is attractive, and the profitable area
of the risk profile is wider than that of the Long
Butterfly.
Market
Opinion
Directional
neutral. You anticipate low volatility in the price of the stock.
P/L
When
To Use
Use
this strategy when you are looking for capital gain at a very low cost.
Example
XXXX
is trading t $52.87 on May 14, 2011.
Buy
June 2011 45 strike put for $0.51.
Sell
June 2011 50 strike put at $1.80.
Sell
June 2011 55 strike put at $4.30.
Buy
June 2011 60 strike put for $7.92.
Net
debit premiums bought minus premiums sold = $2.33
Benefit
The
benefit of this trade is that it gives you the opportunity to make a profit
from a stock that is rangebound for little cost and capped risk.
Risk
vs. Reward
The
risk is the net debit of the sold and bought options. The reward is the
difference between adjacent strikes minus the net debit.
Net
Upside
The
difference between adjacent strikes minus the net debit.
Net
Downside
The
net debit paid.
Break
Even Point
Break
even up: higher strike minus net debit.
Break
even down: lower strike plus net debit.
Effect
Of Volatility
You
want very little volatility in the stock price.
Effect
Of Time Decay
Positive
when the position is profitable, and negative when it is not profitable.
Alternatives
Before Expiration
To
stem a loss, unravel the position.
Alternatives
After Expiration
Close
out the position by selling the options you bought and buying back the options
you sold.