Long Put Condor

The Long Put Condor Setup

Let’s take a hypothetical case of GHI Corp trading at $50 per share, and you expect it to trade between a narrow trading range. You establish a Long Put Condor by:

• Buying a put option with a $55 strike price for $5.
• Selling a put option with a $50 strike price for $3.
• Selling another put option with a $45 strike price for $2.
• Buying a put option with a $40 strike price for $1.

All options expire in three months.

Who Should Consider It

This strategy is mainly for traders expecting the stock to trade close to the two mid-strike price options at expiration. It is suited for low-volatility market environments in which large price swings probably won’t occur.

Strategy Explained

The Long Put Condor engages both put buying and selling to establish a position that enables maximal gains when the stock price remains within a precise range between the mid strikes. This lowers the entry cost by a factor equivalent to the premiums received from sold puts.

Breakeven Process

There are two breakeven points for the Long Put Condor:

• Upper breakeven: higher strike of bought put net premium paid.
• Lower breakeven: lower strike of bought put plus net premium paid.

Sweet Spot

The sweet spot for this strategy becomes the stock price at expiration, lying between the two middle strike prices ($50 and $45 in this example).

Max Profit Potential

A Long Put Condor gives the trader the opportunity to earn maximum profit, which is equality to the difference between the two middle strike prices minus the net cost of setting up the positions. This may be calculated from this example with the equation: ($50 x $45 - net premium paid).

Max Loss:

Maximum loss is limited to the net premium paid to establish the spread. This occurs if the stock finishes below the lowest strike or above the highest strike at expiration.

Risk

Risk is limited to the extent of premium paid. The principal risk arises if the stock goes significantly out of expected range by either falling below lowest strike or getting over the highest strike.

Time Decay

Time decay, or theta, is positive for the strategy as it comes closer to expiration, as long as the underlying stock price stays within the two breakeven prices. Since rotations incorporate both long and short positions, the time decay effects could somewhat cancel each other out.

Implied Volatility

The effects of a changing implied volatility can be rather complicated on such a strategy. A rise in volatility increases the value of the long positions much more than it affects the short positions, which could be useful if the stock price hovers most closely to the lower breakeven point. Generally, under this strategy and as expiration approaches, low volatility becomes very good in case the stock is near the upper breakeven point.

Conclusion

The Long Put Condor is an advanced strategy most suited for experienced traders anticipating only slight price movements within a comparatively defined range, providing limited risk with capped potential returns and losses, thus appealing during times of low volatility in markets.