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Long Put Condor Option Strategy

Long Put Condor Option Strategy

What is Long Put Condor Option Strategy?

  • Long Put Condor Option Strategy is a range bound strategy. Which consist of 4 different calls of the same expiration. Long Put Condor offers a good Reward / Risk with low cost. Long Put Condor is a directional neutral strategy. Another way to interpret this strategy as a combination of In-The-Money bear Put Spread, and out of the money Bull Put Spread.

When to Execute?

  • Long put Condor should be devised when we expect less volatility in the underlying till expiry. It is similar to Put Butterfly Spread with variation that instead of selling 2 ATM Call, we sell 1 ATM Call and 1 OTM Call. In scenarios where the strike difference between 1st and 2nd strike is not equal to the difference between 3rd and 4th strike; it is known as Modified Long Put Condor Strategy.

What is the Trade?

  • Long Put Condor can be executed by Buying 1 lot In-the- Money (ITM) Put, Sell 1 lot At-the-Money (ATM) Put, Sell 1 lot Out-of-Money OTM Put and Buy 1 lot Deep OTM Put.

What will be maximum profit?

  • The maximum gain under this strategy will be if the underlying expires in between the two short call strikes. Maximum Profit is the difference between first and second strike less net outflow.

What will be maximum loss?

  • In all circumstances the maximum loss under long put condor is limited to the net debit paid (assuming the distances between all four strikes prices are equal). The maximum loss would occur if the underlying was below the lowest long put strike at expiration or at or above the highest long put strike. At the highest strike all the options would expire worthless, and the debit paid to initiate the position would be lost. At expiration, all the options above the lower strike would be in-the-money and the resulting profits and losses would offset.

What are the advantages?

  • Long Put condor provides a high yielding strategy with low cost. It is best suited for low volatility stock. It is idle for current month expiry.

What are the disadvantages?

  • Time decay is harmful if the stock is below first strike or above fourth strike call and advantageous if the stock is between second and third strike call.

Example for Long Put Condor:

  • Nifty future price is 15800. A Long Put Condor can be devised as follows +1 X 16200 PE = 492.00 -1 X 16000 PE = 363.45 Spot 15800 -1 X 15600 PE = 189.10 +1X 15400 PE = 132.80 There are two breakeven points under Iron Condor. Downside breakeven = lowest long Put strike + premium paid = 15400 + 72.25 = 15473.00 Upside breakeven = highest long call strike - premium paid = 16200 – 59.55 = 16127.00