What it is
Four options on one stock with one expiry. Below today's price a sold put sits over a cheaper bought put; above it a sold call sits under a cheaper bought call. The two sold options bring in the credit, and the two bought ones, the wings, limit what either side can lose.
It is a short strangle with protection bought on both ends, or a put credit spread and a call credit spread opened as one trade. The name comes from the shape of the payoff: a flat body in the middle and two wings dropping away.
What has to happen for it to make money
It needs the stock to end between the two break-evens: the lower short strike minus the credit, and the upper short strike plus it. Between the two short strikes nothing is owed and the credit stays whole. Outside them the profit fades, and beyond either wing the loss is at its maximum and grows no further.
Direction does not matter, only distance. A drop in volatility helps before expiry, because the sold options, which are closer to the money, lose value faster than the wings.
Once it is on
Only one side can lose at expiry, since the stock cannot finish below the put spread and above the call spread at once. That is why brokers usually ask for margin on one side only, and why the risk is the width of one spread less the total credit.
The usual management is to leave the side the stock is moving away from alone and deal with the side it is moving toward: close it, roll it further away, or close the whole condor once the bulk of the credit has been earned. Each of those decisions costs commissions on several legs, which adds up on a structure this busy.
What goes wrong
A breakout either way. Earnings, guidance or a market-wide shock can carry the stock through a wing in a day. The loss stops there, but it is usually two or three times the credit.
Many small wins, then one large loss. Like every range trade, it wins often and loses big, so a run of successes says little about whether the strategy is working until a breakout has been lived through.
Pros and cons
- Pro: paid for a stock that stays in a range, either direction.
- Pro: losses are capped on both sides.
- Pro: margin is set by one wing's width, not the whole position.
- Con: four legs to open and close, with four sets of costs.
- Con: a breakout costs several months of credit.
- Con: the range narrows as a stock gets more volatile.
In Restrike
The Log and the Portfolio pair options by right, so a condor reads as two spreads, the put spread and the call spread, each folded into one position. Give both the same strategy label and the scorecards count them together. Brokerage import is read-only, and Restrike never places a trade.