Long Condor Spread w/Puts

Long call condor spread - Options Playbook

The setup

Buy a put, strike price A
Sell a put, strike price B
Sell a put, strike price C
Buy a put, strike price D
Generally, the stock will be between strike price Band strike price C

The strategy

You can think of a long condor spread with puts as simultaneously running an in-the-money short put spread and an out-of-the-money long put spread. Ideally, you want the short put spread to expire worthless, while the long put spread achieves its maximum value with strikes C and D in-the-money.

Typically, the stock will be halfway between strike B and strike C when you construct your spread. If the stock is not in the center at initiation, the strategy will be either bullish or bearish.

The distance between strikes A and B is usually the same as the distance between strikes C and D. However, the distance between strikes B and C may vary to give you a wider sweet spot (see Options Guy's Tips).

You want the stock price to end up somewhere between strike B and strike C at expiration. Condor spreads have a wider sweet spot than the butterflies. But (as always) there’s a tradeoff. In this case, it’s that your potential profit is lower.

Options guys tips

You may wish to consider ensuring that strike B and strike C are around one standard deviation away from the stock price at initiation. That will increase your probability of success. However, the further these strike prices are from the current stock price, the lower the potential profit will be from this strategy.

Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.

As a general rule of thumb, you may wish to consider running this strategy approximately 30-45 days from expiration to take advantage of accelerating time decay as expiration approaches. Of course, this depends on the underlying stock and market conditions such as implied volatility.

Who should run it

Veterans and higher

When to run it

You’re anticipating minimal movement on the stock within a specific time frame.

Break-even at expiration

There are two break-even points:

Strike A plus the net debit paid
Strike D minus the net debit paid

The sweet spot

You achieve maximum profit if the stock price is anywhere between strike B and strike C at expiration.

Maximum potential profit

Potential profit is limited to strike D minus strike C minusthe net debit paid.

Maximum potential loss

Risk is limited to the net debit paid to establish the condor.

Margin requirement

After the trade is paid for, no additional margin is required.

As time goes by

For this strategy, time decay is your friend. Ideally, you want the options with strike A and strike B to expire worthless, and the options with strike C and strike D to retain their intrinsic values.

Implied volatility

After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.

If the stock is near or between strikes C and B, you want volatility to decrease. Your main concern is the two options you sold at those strikes. A decrease in implied volatility will cause those options to decrease in value, thereby increasing the overall value of the condor. In addition, you want the stock price to remain stable, and a decrease in implied volatility suggests that may be the case.

If the stock price is approaching or outside strike D or A, in general you want volatility to increase. An increase in volatility will increase the value of the option you own at the near-the-money strike, while having less effect on the short options at strikes C and B.

When running a calendar spread with calls, you’re selling and buying a call with the same strike price, but the call you buy will have a later expiration date than the call you sell. You’re taking advantage of accelerating time decay on the front-month (shorter-term) call as expiration approaches...