The traditional condor will cost the buyer of this spread 20¢ a share, or $200 on 10 contracts. Because the spread is long 10 contracts of a $1 (27-26 strike) put spread, the most that can be made is a net of $800 ($1,000—$200 debit). Investing $200 on something that can return $800 usually is prudent, especially considering the risk in a naked position — the owners of 500 shares of FB currently are down roughly $5,000 — but we missed the initial sell-off and don’t want to risk a loss if the move stalls.
Meanwhile, the cost of the unbalanced condor is zero because of the extra spreads sold. Yes, there is a slightly higher level of risk, but the odds remain in our favor, and at no cost.
Would you rather lose $200 on the traditional condor should the stock remain flat, fall a little or run higher, or would you rather lose nothing under the same circumstances with the unbalanced condor — but have $1,000 of risk should a small statistical event occur?
“Getting in for free” shows the break-even graph of this spread on expiration day (when there is no time value left in the options).
The graph shows a comparison between the traditional condor and the unbalanced. You will notice that, all the way down to roughly $21.50, the unbalanced condor greatly outperforms the traditional condor, as long as you are not concerned about the stock falling another 23.7% in the next few weeks. Again, you are trading a small additional risk that can occur only about 17% of the time for a greatly lower entry cost.
The spread also can be done with calls to orchestrate a bullish position for those believing that the stock has hit a bottom.
J.L. Lord is an analyst and author of many articles for RandomWalkTrading.com.