Short Put Condor

The Short Put Condor is an options strategy that is employed to benefit from a specific range in the price of the underlying stock, in a similar way the Short Call Condor is employed but with put options. The strategy involves selling two put options with different strike prices and buying two put options with even higher strike prices, all with the same expiration. It is most suitable when a trader expects little volatility and expects the stock to be in a specific range of prices.

Short Put Condor


The Short Put Condor Setup

Suppose there is a company, XYZ Corp, trading at $50. To establish a Short Put Condor, you would:

  • Buy a put option with a very low strike price, say $40, for $1.
  • Sell a put option with a higher strike price, say $45, for $2.
  • Sell another put option with a slightly higher strike price, say $55, for $3.
  • Buy a put option with the highest strike price, say $60, for $4.

All the options expire in three months.


Who Should Consider It

The strategy is most suitable for traders who expect the stock not to move much in price and who wish to benefit from option premium decay. It’s for those who wish to minimize potential loss but still earn a net credit on trades.


Strategy Explained

The Short Put Condor involves selling puts at middle strikes ($45 and $55) where the trader earns premiums and buying puts at outer strikes ($40 and $60) to limit the possible losses. The desired result is that the price of the underlying stock stays in between the middle strikes as expiration gets near, and the trader gets to keep the maximum premium.


Breakeven Process

There are two breakeven points for this strategy:

  • Upper breakeven: Higher middle strike + net premium received.
  • Lower breakeven: Lower middle strike - net premium received.

For example, if the net premium received is $0 ($2 + $3 - $1 - $4), the breakeven points would be $45 (lower middle strike) and $55 (higher middle strike).


Sweet Spot

The best scenario (sweet spot) is when the stock price at expiration is between the two middle strikes of the put options sold ($45 and $55). This provides the maximum retained premium while all puts expire worthless.


Max Profit Potential

The maximum profit is the net premium received from the initial setup of the spread, which is retained if the stock price is between the two sold strikes at expiration.


Max Loss

The maximum loss is the difference between the adjacent strikes minus the net premium received, realized if the stock price moves significantly below the lowest strike or above the highest strike. Based on the example strikes, the maximum loss would be if the stock price is at or below $40 or at or above $60.


Risk

The highest risk is the stock price moving outside the middle strikes range, specifically moving significantly beyond the strikes of the purchased puts, where the losses would be more than the premiums received, although capped by the long put positions.


Time Decay

Time decay (theta) is favorable to this strategy since the trader wants all the options, particularly the short positions, to expire worthless. This decay increases as the options approach expiration.


Implied Volatility

Lower implied volatility is favorable to the Short Put Condor post-setup since it decreases the likelihood of the stock price reaching the outer strikes, thus favoring the decay of the options’ premiums.


Conclusion

The Short Put Condor is a conservative strategy that profits from low volatility and a stable stock price within a given range. It enables traders to generate premium income with limited and controlled risk, and it is a great strategy for moderately bullish to neutral market expectations.