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Description and use

Short Put Condor is similar to Short Call Condor, but it consists of Put options instead of Call options. Short Put Condor option is the opposite of Long Put Condor. Despite the net credit investment, it is not popular, because its return is smaller than a Straddle’s or a Strangle’s return. To establish the position, the trader has to sell a lower strike Short Put, in the middle there have to be a lowerer strike OTM Long Put and a higherer strike ITM Long Put, and finally, the trader has to sell a higher strike ITM Short Put option. The investor can profit from shares with large price fluctuations. The disadvantage of this strategy is the limited profit and the maximum loss when share prices are stagnating. The direction of the market is neutral. The investor speculates on shares with high volatility. The potential profit has an upper limit. The expiration should be at least three months.

  • Type: Neutral
  • Transaction type: Credit
  • Maximum profit: Limited
  • Maximum loss: Limited
  • Strategy: Volatility strategy

Opening the position

Short Put Condor Option Positions

Short Put Condor Option Positions

  • Sell a lower strike (OTM) Put option.
  • Buy a middle lowerer strike (OTM) Put option.
  • Buy a middle higherer strike (ITM) Put option.
  • Sell a higher strike (ITM) Put option.
  • All components must have the same expiration. Only Put options are used. The difference between consecutive strike prices must be equal.

Steps

Entry:

  • Look for shares showing pennant or similar shapes on charts.

Exit:

  • The position can be closed only before maturity.

Basic characteristics

Maximum loss: Difference between consecutive strike prices - Net credit.

Maximum profit: Net Credit.

Time decay: Time usually has a negative effect on the value. However, when the position is making profit, time can have a positive effect as well.

Lower breakeven point: Lower strike price + Net Credit.

Upper breakeven point: Higher strike price - Net credit.

Advantages and disadvantages

Advantages:

  • The investor can profit from share prices moving within given limits.
  • Limited loss.

Disadvantages:

  • Profit can be increased only if the strike prices are farther from each other.
  • Potentially higher profit is only possible close to expiration.
  • The potential loss is much larger than the potential profit.

Closing the position

Closing the position:

  • Buy back the Short Puts and sell the Long Puts.

Mitigation of losses:

  • Close the position the above-mentioned way.

Example

Short Put Condor strategy example

Short Put Condor strategy example

ABCD is traded for $52.87 on 17.05.2017. The investor sells a Short Put option which has a strike price of $45.00, expires in August 2017. and costs $1.88 (premium). Then he buys a Long Put option which has a strike price of $50.00, expires in August 2017. and costs $3.73 (premium). Then he buys another Long Put option which has a strike price of $55.00, expires in August 2017. and costs $6.33 (premium). Finally, sells another Short Put option which has a strike price of $60.00, expires in August 2017. and costs $9.60 (premium).

Price of the underlying (share price): S= $52.87
Premium (Short Put 1): LP1= $1.88
Premium (Long Put 1): SP1= $3.73
Premium (Long Put 2): SP2= $6.33
Premium (Short Put 2): LP2= $9.60
Strike price (Short Put 1): KS1= $45.00
Strike price (Long Put 1): KL1= $50.00
Strike price (Long Put 2): KL2= $55.00
Strike price (Short Put 2): KS2= $60.00
Net credit: NCr
Maximum loss: R
Maximum profit: Pr
Lower breakeven point: LBEP
Upper breakeven point: UBEP

Net credit: NCr = (SP1 + SP2) - (LP1 + LP2)
Maximum loss (risk): R = (KL2 - KS2) - NCr or R = (KS2 - KL1) - NCr or R = (KS1 - KL1) - NCr
Maximum profit: Pr = NCr
Lower breakeven point: LBEP = KL1 + NCr
Upper breakeven point: UBEP = KL2 - NCr

NCr = $1.42
R = $3.58
Pr = $1.42
LBEP = $46.42
UBEP = $58.58