Short Put Condor

The Short Put Condor is an options strategy designed to profit from a specific range within the underlying asset's price, similar to the Short Call Condor but using put options. This strategy involves selling two put options at different strike prices and buying two put options at even further strike prices, all with the same expiration date. It is best used when a trader expects little volatility and believes the stock will stay within a specific price range.

The Setup

Imagine 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 options expire in three months.

Who Should Consider It

This strategy is ideal for traders who anticipate that the stock will not move much in price and who are looking to benefit from the decay of option premiums. It’s suitable for those seeking to limit potential losses while still generating a net credit from trades.

Strategy Explained

The Short Put Condor involves selling puts at middle strikes ($45 and $55) where the trader collects premiums and buys puts at outer strikes ($40 and $60) to cap the potential losses. The desired scenario is for the underlying stock’s price to remain between the middle strikes as expiration approaches, allowing the trader to retain the maximum possible 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 optimal 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 maximizes the retained premium while all puts expire worthless.

Max Profit Potential

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

Max Loss

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

Risk

The primary risk is the stock price moving outside the range of the middle strikes, especially moving significantly beyond the strikes of the bought puts, where the losses could exceed the premiums received, though they are capped by the long put positions.

Time Decay

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

Implied Volatility

Lower implied volatility benefits the Short Put Condor post-setup because it reduces the probability 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 benefits from low volatility and a stable stock price within a defined range. It allows traders to generate premium income with controlled and limited risk, making it an attractive strategy for moderately bullish to neutral market outlooks