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.