If you expect the underlying asset to fluctuate sideways in a certain range in the future and are unwilling to take too much risk, you can use the buy long put condor strategy.

How to build

long put condor strategy consists of four options trades

● Buy 1 copy of put1

● Sell 1 copy of put2

● Sell 1 copy of put3

● Buy 1 copy of put4

The quantity of put, put2, put3, and put4, the underlying assets, and expiration dates are all the same. The differences are:

Exercise price: put1＜put2＜put3＜put4, put2-put1=put4-put3

Strategy brief

Long put condor strategy. Normally, opening a position is to buy an imaginary value put1 with a low interest price, sell a copy of the imaginary value put2 with a low to medium option price, sell a copy of the real value put3 with a medium to high position price, and then buy a real value put4 with a high interest price.

The underlying asset, maturity date, and quantity of all options are the same.

The difference between the exercise price of put2 and put1 is equal to the difference between the exercise price of put4 and put3.

The difference between the exercise price of the two options in the middle can be adjusted flexibly according to one's own judgment on the market. The difference in the exercise price of the four options is a general form of hawk-style spread.

If you take this combination apart, it's actually a combination of a bull market spread and a bear market spread.

Buying put1 and selling 1 share of put2 is the spread of a bull put option; selling 1 put3 and buying put4 is a spread of a bearish put option.

Like a combination of bull and bear spreads, long put condor strategy is also a strategy with limited risk and return. The maximum profit and maximum loss of the strategy can be calculated when opening a position.

When the stock price is higher than the highest exercise price or lower than the minimum exercise price, the strategy makes the biggest loss; when the stock price falls between the two middle exercise prices, the strategy gains the most profit.

When analyzing this combination of strategies, we are still starting from the construction motivations.

Selling 2 put options in the middle is the main part of this strategy. It is used to achieve profits in anticipation that “there will be no big change in stock prices”. Buying put options on both sides is used to hedge the risk of selling put options.

This strategy is suitable for investors who have a high degree of confidence in the upper and lower limits of stock price fluctuations, and at the same time are risk-averse.

More professional investors will adjust the strategy at any time according to market changes after opening an option strategy to “break up” the strategy in order to reap more cost-effective risk returns.

In addition, under normal circumstances, the butterfly spread strategy for buying put options will be slightly less than the premium expenses for buying put1 and put4 when opening a position, so at the beginning of strategy construction, the strategy showed a net outflow on the book.

Finally, it should be noted that to buy long put condor strategy and open a position, you need to trade 4 options, and you need to trade 8 options back and forth. The transaction cost is relatively high, and you need to calculate the actual cost during actual use.

Risks and benefits

● Break-even point

Low break-even point: stock price = low exercise price+net option premium expenses

High break-even point: stock price = high exercise price - net option premium expenses

● Maximum profit

Maximum return = high exercise price - medium to high exercise price - net option premium expenses

● Maximum loss

Net option premium expenses

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You think TUTU will probably fluctuate between 48-56 US dollars in the future, and at the same time want to limit risk, so I created a long put condor strategy:

Buy 1 put with an exercise price of 48 US dollars at the price of 1 US dollar;

Sell 1 put with an exercise price of 50 US dollars at a price of 2 US dollars;

Sell 1 put with an exercise price of 54 US dollars at a price of 4 US dollars;

Buy 1 put with an exercise price of 56 US dollars at a price of 6 US dollars;

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.