Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Long Condor Spread with Puts

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 B and strike price C

NOTE: All options have the same expiration month.

Who Should Run It

All-Stars

When to Run It

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

The Sweet Spot

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



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

You can think of put condor spread as simultaneously running an in-the-money bull (or short) put spread and an out-of-the-money bear (or 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.

Maximum Potential Profit

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

Maximum Potential Loss

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

Break-even at Expiration

There are two break-even points:

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

TradeKing Margin Requirements

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.

Options Guy's 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.


Tools

1331 Auto Trade Image
AutoTrade TradeKing’s AutoTrade service lets you automate trade signals from your favorite investment newsletter in your TradeKing account.

624 New Stock Screener Image
Stock Screener It’s never been easier to find stocks that suit your investing objectives. Design and save your own custom screens to find exactly what you want.

1290 Mutual Fund screener small image
Mutual Fund Screener Pin-point the right mutual fund for your investing goals. Create customized screens based on your own search criteria.

More tools...

Related Strategies

222 Long Put Spread
Long Put Spread A long put spread gives you the right to sell stock at strike price B and obligates you to buy stock at strike price A if assigned. This strategy is an alternative to buying a long put. Selling a...

401 Skip Strike Butterfly w/ Puts Image
Skip Strike Butterfly with Puts You can think of this strategy as embedding a bull (short) put spread inside a long put butterfly spread. Essentially, you're selling the short put spread to help pay for the butterfly. Because...

333 Back Spread w/Calls Image
Back Spread with Calls This is an interesting and unusual strategy. Essentially, you’re selling an at-the-money short call spread in order to help pay for the extra out-of-the-money long call at strike B. Ideally, you...

More strategies...