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Put Broken Wing Condor Spread - Introduction
The Put Broken Wing Condor Spread, also known as the Broken Wing Put Condor Spread or Skip Strike Condor Spread, is a variant of the Put Condor Spread options trading strategy. Similar to the Put Condor Spread, it is a neutral options strategy but unlike the Put Condor Spread, it transfers all the risk of loss when the stock breaks upwards onto the downwards side. This means that the Put Broken Wing Condor Spread does not lose money when the stock rallies upwards but will lose more money than a Put Condor Spread if the stock ditches. This is particularly useful when the stock is expected to either stay stagnant or rally.
Yes, Broken Wing Condor Spreads are Condor Spreads that transfer the risk of loss on one leg onto the other. This creates an assymetric risk graph that favors the stock moving in a certain direction. The Put Broken Wing Condor Spread protects against the stock rallying while the
call Broken Wing Condor Spread protects against the stock breaking downwards. Learn about
Broken Wing Condor Spreads first.
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Main Difference Between Put Broken Wing Condor Spread and Condor Spread
The main difference between the Put Broken wing Condor Spread and the Condor Spread is that the Put Broken wing Condor Spread transfers the potential upside losses onto the downside. The Put Broken Wing Condor Spread achieves this simply by buying further out of the money
put options instead of put options at the same distance from the short strike price as the in the money Put Options.
In a regular Condor Spread options trading strategy, both in the money options and out of the money options are bought at an equidistance from the short strike price. This creates a symmetrical risk graph with equal risk of loss on both upside and downside.
By moving the out of the money Put Options further away from the short strike price than the in the money Put Options, the Broken Wing Condor Spread reduces the debit of the position to the extend that the position is either a zero cost position or a
credit spread. The result of such an adjustment is that if the stock goes upwards, the position gains the net
credit if it is a credit spread or simply makes no loss if the position is a zero cost one.
Put Broken Wing Condor Spread Example
Assuming QQQQ trading at $43.57.
Regular Put Condor Spread
Buy To Open 1 contract of Jan $45 Put at $2.38
Sell To Open 1 contract of Jan $44 Put at $1.63
Sell To Open 1 contract of Jan $43 Put at $1.03
Buy To Open 1 contract of Jan $42 Put at $0.60
Net Debit = (($2.38 + $0.60) - ($1.63 + $1.03)) x 100 = $32.00 per position
Put Broken Wing Condor Spread
Buy To Open 1 contract of Jan $45 Put at $2.38
Sell To Open 1 contract of Jan $44 Put at $1.63
Sell To Open 1 contract of Jan $43 Put at $1.03
Buy To Open 1 contract of Jan $41 Put at $0.20
Net Credit = (($2.38 + $0.20) - ($1.63 + $1.03)) x 100 = $8.00 per position
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The Put Broken Wing Condor Spread options trading strategy is so named because one "wing" is shorter than the other. Risk can also be transferred to downside so that when the stock ditches, the position makes no loss through using a Call Broken Wing Condor Spread. Both Put Broken Wing Condor Spread and Call Broken Wing Condor Spreads are variants of the Condor Spread which options traders can use to better tailor the position to a multi-directional expectation.
When To Use Put Broken Wing Condor Spread?
One should use a Put Broken Wing Condor Spread when one expects the price of the underlying asset to change very little over the life of the option contracts and speculates that even if the underlying asset should stage a breakout, the breakout will most likely be upwards.
How To Use Put Broken Wing Condor Spread?
A Put broken wing condor spread is actually made up of two different spreads. An Out of The Money
Bull Put Spread and an In the money
Bear Put Spread. There are 4 trades to make: Sell To Open In The Money put options + Buy to Open Deeper in the money put options (ITM Bear Put spread) + Sell to Open Out of the Money put options + Buy to open further out of the money put options with strike difference greater than in the ITM bear put spread (OTM Bull Put Spread).
The profitable range of the put broken Wing condor spread is largely determined by the difference in strike between the two short put options. The wider the strike difference, the lower the maximum profit becomes but the larger the profitable price range which increases the probability of making a profit. So, its a trade off between the probability of profiting and the amount of potential profit. This is the kind of trade off that you will see in options trading all the time.
As the out of the money put option determines the point beyond which the position will stop making a loss when the stock drops, buying a further out of the money put option means a higher maximum potential loss than a regular put condor spread that would have bought the out of the money put option at the same strike difference as the in the money wing.
Put Broken Wing Condor Spread Example
Assuming QQQQ trading at $43.57.
Buy To Open 1 contract of Jan $45 Put at $2.38
Sell To Open 1 contract of Jan $44 Put at $1.63
Sell To Open 1 contract of Jan $43 Put at $1.03
Buy To Open 1 contract of Jan $41 Put at $0.20
Net Credit = (($2.38 + $0.20) - ($1.63 + $1.03)) x 100 = $8.00 per position
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Profit Potential of Put Broken Wing Condor Spread :
Put Broken Wing Condor Spreads achieve their maximum profit potential at expiration if the price of the underlying asset is between the two short strike prices.
Put Broken Wing Condor Spread
Assuming QQQQ close between $44 and $43 at expiration. You will profit from the value of the 2 short Put Options and you will
lose the value of the long out of the money put option and the extrinsic value of the in the money put option.
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Trading Level Required For Put Broken Wing Condor Spread
A Level 4 options trading account that allows the execution of credit spreads is needed for the Put Broken Wing Condor Spread. Read more about Options Account Trading Levels.
Profit Calculation of Put Broken Wing Condor Spread:
Maximum Profit = [(Difference between two highest strikes) + Net Credit] x 100
Maximum Loss = ((Skipped strike - lowest strike) - net credit) x 100
From the above example :
Maximum Profit = [(45 - 44) + 0.08] x 100 = 1.08 x 100 = $108 per position
Maximum Loss = ((42 - 41) - 0.08) x 100 = 0.92 x 100 = $92 per position
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Risk / Reward of Put Broken Wing Condor Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
Losing Point (Break even point) of Put Broken Wing Condor Spread:
A Put Broken Wing Condor Spread makes a loss only when the stock drops below the losing point.
Losing point = skipped strike - net credit
From the above example :
Losing Point = $42 - $0.08 = $41.92.
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Advantages Of Put Broken Wing Condor Spread:
Transfer downside risk totally into the upside leg.
Higher maximum profit than a regular Put Condor Spread.
Disadvantages Of Put Broken Wing Condor Spread:
Higher margin requirement than a regular Put Condor Spread.
Higher maximum loss than a regular Put Condor Spread.
Alternate Actions for Put Broken Wing Condor Spreads Before Expiration :
1. If the underlying asset has dropped in price and is expected to continue dropping, you could buy back the short Put Options and
hold the long Put Options.
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