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Short Put Condor Option Strategy

Short Put Condor Option Strategy

What is Short Put Condor Option Strategy?

  • Short Put Condor Option Strategy is a Volatility strategy. Which consist of 4 different calls of the same expiration. Short Put Condor offers a low Reward for relative higher risk. Short Put Condor is a directional neutral strategy. Another way to interpret this strategy is a combination of In-The-Money Bull Put Spread, and out of the money Bear Put Spread.

When to Execute?

  • Short Put Condor should be devised when we expect high volatility in the underlying. Short Put Condor is a volatility strategy that expects big moves in the underlying to make money. In scenario where strike difference between 1st and 2nd strike is not equal to difference between 3rd and 4th strike; it is known as Modified Short Put Condor Strategy.

What is the Trade?

  • Sell 1 ITM Put, buy 1 middle ITM Put, Buy 1 middle OTM Put and Sell 1 deep OTM Put.

What will be maximum profit?

  • The maximum gain under this strategy will be if the underlying expires above and lower strike price.

What will be maximum loss?

  • n all circumstances the maximum profit is under short put condor is limited to the net received (assuming the distances between all four strikes prices are equal). The maximum Loss under this strategy will be if the underlying expires between the sold and the strike price. Maximum loss is the difference between first and second call less net credit received.

What are the advantages?

  • Idle for the stock that is range bound for the long time and is expected to give breakout/ breakdown. It is a net credit strategy with defined reward to risk.

What are the disadvantages?

  • 1. Time decay could be beneficial if the stock is near the extremes and can hurt if the stock expires between the middle two strikes. 2.Higher profit potential comes only near expiration.

Example for Short Put Condor:

  • Nifty future price is 15800. A Short-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 Short Put. Downside breakeven = lowest short Put strike + premium paid = 15400 + 72.25 = 15473.00 Upside breakeven = highest short Put strike - premium paid = 16200 – 59.55 = 16127.00