Condor put

Article contents



At a glance



Setting up the strategy


  1. Buy one out-of-the-money put 

  2. Sell one out-of-the-money put with a higher strike price

  3. Sell one in-the-money put

  4. Buy one in-the-money put with a higher strike price
All options must have the same expiry date. At expiration, you want the stock to close between the strike prices of the short puts.

Who should run this?


Advanced traders only.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



A condor put is an option strategy in which a trader simultaneously does the following:

  • Buys one out-of-the-money put
  • Sells one out-of-the-money put with a higher strike price
  • Sells one in-the-money put
  • Buys one in-the-money put with a higher strike price
All put options must have the same expiry date.


Market outlook


  • Neutral

Strategy benefits


  • Profit potential is good because there’s a relatively low cost required entering into the strategy.
  • Risk is minimal if the stock were to rise or drop significantly.
  • Maximum loss and maximum profit can be accurately estimated.
  • Can still profit if the stock remains stagnant.

Strategy downsides


  • Lower maximum profit and higher maximum loss than other neutral strategies.
  • Strategy should only be implemented by experienced traders due to its complexity.

Condor put example



Scenario


ABC shares are currently trading at $42 in March 2013, and you believe the stock will remain stagnant for the next 30 days. To set up a condor put strategy, you do the following:


  • Buy one April $32 put option for $15 ($0.15 premium  x 100 shares)
  • Sell one April $37put option for $42 ($0.42 premium  x 100 shares)
  • Sell one April $47 put option for $625 ($6.25 premium x 100 shares)
  • Buy one April $52 put option for $770 ($7.70 premium x 100 shares)
To implement this strategy, you will be initially debited $118.


Possible results

  1. At expiration, the stock drops to $30, meaning all the put options would expire in the money. Your total loss would be $118, which was your initial debit required to initiate the strategy.

  2. The stock closes at $45 at expiration. In this case, the 47 short put and 52 long put would expire in the money, while the other put options would expire worthless. Your profit on the trade would be $500. After subtracting the $118 you used to enter the trade, your total profit would be $382.

  3. Upon expiration, the stock closes at $53, meaning all put options expire worthless. Again, your total loss would be the $118 that was initially debited from your account to set up the strategy.

Profit and loss explained



Maximum profit

Maximum profit = strike price of higher strike long put – strike price of higher strike short put – option premium paid

Maximum loss

Maximum loss = net debit


Break-even at expiration

There are two break-even points at expiration:

  • Break-even point #1= strike price of low strike long put + net debit paid
  • Break-even point #2 = strike price of high strike long put – net debit paid

Sample calculations



  • Stock value at start of strategy: $42
  • To execute the strategy: Buy $32 put option for $15, Sell $37 put option for $42, Sell $47 put  option for $625, Buy $52 put option for $770
  • Result: $118 net debit
Stock price at expiration Profit and loss calculations 
$30 In this case, all options would be assigned:


$32 (lower strike long put) x 100 (number of shares)
+ $52 (higher strike long put) x 100 (number of shares)
–  $37 (lower strike short put) x 100 (number of shares)
+ $47 (higher strike short put) x 100 (number of shares)
–  $118 (net debit paid to initiate the strategy)
= $118 loss
$45 In this case, the higher strike short put and higher strike long put expire in the money, while the lower strike put options would expire worthless.

The trade transaction would look as follows:


$52 (higher strike long put)
– $47 (higher strike short put)
x 100 (number of shares per option contract)
–  $118 (net debit paid to initiate the strategy)
= $382 profit

$53 In this case, all options would expire worthless:


$0.42 (option premium received per share for selling the lower strike short put)
x 100 shares
+
$6.25 (option premium received per share for selling the higher strike short put)
x 100 shares

$0.15 (option premium paid per share for buying the lower strike long put)
x 100 shares
$7.70 (option premium paid per share for buying the higher strike long put)
= $118 loss



Note
: commission fees are not included in the above calculations.


Payoff diagram






Creating a condor put







Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a condor put strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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