Options Trading Strategies: Short Condor Puts
A short condor spread with puts is a four legged strategy and is created by selling one Out of The Money put at a lowest strike price, buying one Out of The Money put with a higher strike price, buying another In The Money put with an even higher strike price, and selling one more In The Money put with a highest strike price. All puts are with a same expiration date and there is an equal distance between each strike.
A short condor spread with puts is identical to the short condor with calls, only instead of calls it uses puts, and the opposite to the long condor with puts strategy.
You can look at a short condor spread with puts as a combination of a bull put spread and a bear put spread.
When to use this strategy?
You are neutral on the market movement and bullish on the volatility, so you are expecting a BTC/ETH price movement outside the range of the highest and lowest strike price and want to earn a profit if the BTC/ETH makes a drastic move in either direction.
Below is a Profit and Loss chart example of a short condor with calls options strategy:
Pros:
Maximum loss is capped
Cons:
The higher profit potential comes with a wider range between the middle strikes, which widens the spread lowering your probability for profit. The amount of the potential loss can be bigger than the amount of the potential profit.
Example:
In this example, BTC is trading at 38,401.10 USD, and you expect its price to dramatically move in either direction. You have sold an OTM put with a strike price of 36,000.00 USD, bought an OTM put with with a strike price of 37,000.00 USD, bought an ITM put with a strike price of 39,000.00 USD, and sold an ITM put with a strike price of 40,000.00 USD, all with an expiration date of February 4th 2022.
As this is a net credit spread, and the long puts cost you less than a premium from the short puts, you have received a net premium of 671.55 USD, which is also you maximum profit in this combination.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the long OTM strike and at or above the short OTM put strike, you are in the profit as long as the bitcoin price ends up below the first break even point.
If the BTC price is between the middle strikes, then the ITM short put is exercised and the ITM long put is exercised, and you are at your maximum loss which is equal the difference between the two adjacent wing strikes minus the premium received.
If the BTC price is below the short ITM put strike and at or above the long ITM put strike, you are in the profit as long as the bitcoin price ends up above the second break even point.
Maximum profit is realized if the BTC price is above the short ITM put strike or below the short OTM put strike on the expiration date.
If the BTC price is below the short OTM put strike, then both long puts (middle two strikes) are exercised and the two short puts (highest and lowest strikes) are assigned. The result is that 2 BTC are purchased and 2 BTC are sold, and your maximum gain is the net premium you have received.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 36,000.00 (strike price SP OTM) | + 671.55 (max gain) |
| 36,357.00 | +314.55 |
| 36,671.55 (break even 1) | 0 |
| 36,850.00 | -178.45 |
| 37,000.00 & 39,000.00 (LP OTM, LP ITM) | -328.45 (max loss is between strikes) |
| 39,175.00 | -153.45 |
| 39,328.45 (break even 2) | 0 |
| 39,640.00 | +311.55 |
| 40,000.00 (strike price SP ITM) | + 671.55 (max gain) |