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.
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.