Long Put Condor

 

Description

         

The Long Put Condor is another rangebound strategy and is the opposite of a Short Put Condor, which is a volatility strategy. Long condors are quite popular because they offer a good risk/reward ratio, together with low cost. The long options at the outside strikes ensure that the risk is capped on both sides, and this is a much more conservative strategy than the Short Strangle.

 

The Long Put Condor involves a low strike long put, a lower middle OTM Short Put, a higher middle ITM Short Put, and a higher ITM Long Put. The resulting position yields a position that is profitable in the event of the stock remaining rangebound. Here the risk/reward ratio is attractive, and the profitable area of the risk profile is wider than that of the Long Butterfly.    

 

Market Opinion

         

Directional neutral. You anticipate low volatility in the price of the stock.

 

P/L

 

 

 

 

 

 

When To Use

 

Use this strategy when you are looking for capital gain at a very low cost.

 

Example

 

XXXX is trading t $52.87 on May 14, 2011.

Buy June 2011 45 strike put for $0.51.

Sell June 2011 50 strike put at $1.80.

Sell June 2011 55 strike put at $4.30.

Buy June 2011 60 strike put for $7.92.

 

Net debit premiums bought minus premiums sold = $2.33

 

Benefit

 

The benefit of this trade is that it gives you the opportunity to make a profit from a stock that is rangebound for little cost and capped risk.

 

Risk vs. Reward

 

The risk is the net debit of the sold and bought options. The reward is the difference between adjacent strikes minus the net debit.

 

Net Upside

 

The difference between adjacent strikes minus the net debit.

 

Net Downside

 

The net debit paid.

 

Break Even Point

 

Break even up:  higher strike minus net debit.

 

Break even down: lower strike plus net debit.

 

Effect Of Volatility

 

You want very little volatility in the stock price.

 

Effect Of Time Decay

 

Positive when the position is profitable, and negative when it is not profitable.

 

Alternatives Before Expiration

 

To stem a loss, unravel the position.

 

Alternatives After Expiration

 

Close out the position by selling the options you bought and buying back the options you sold.