Long Put Condor
Entering a long put condor entails buying (1) lower strike put, selling (1) middle strike put, selling (1) higher middle strike put and buying (1) higher strike put (same expiration month, distance between the two lower legs is equal to the distance between the two upper legs). It's essentially a combination of a lower strike bull put spread and a higher strike bear put spread, and it's similar to a long put butterfly except the short puts are spread out over two strikes.
(draw a long put condor risk diagram here)
You're confident a stock will trade in a tight range and not move much from its current position. You employ a lower strike bull put spread, which achieves max profitability when the stock rallies, and a higher strike bear put spread, which achieves max profitability when the stock drops. If you're correct, if the stock doesn't stray too far (preferably stays between the two middle strikes), you'll make money on both legs of the overall strategy.
XYZ is trading at $57.50. You sell (1) 55 put for $2.00 and buy (1) 50 put for $0.50 to complete the bull put spread. Then you sell (1) 60 put for $5.00 and buy (1) 65 put for $9.00 to complete the bear put spread. The net debit is $2.50.
Above the highest strike, all puts expire worthless, and your loss is the net debit paid when the trade was initiated.
Below the lowest strike, all puts are in-the-money and exactly cancel each other out. Your loss is the net debit paid when the trade was initiated. For example, if the stock is at $45, the 50 put will be worth $5 ($4.50 profit), the 55 puts will be worth $10 ($8.00 loss), the 60 put will be worth $15 ($10.00 loss) and the 65 put will be worth $20 ($11.00 profit). The net of this is a $2.50 loss.
Between the middle strikes ($55 and $60), max profitability is achieved. After all, that’s where the lower bull put spread and upper bear put spread are both in their max profit zones. As an example, at $57.5, the 50 and 55 puts will be worthless ($0.50 loss and $2.00 gain), the 60 put will be worth $2.50 ($2.50 profit) and the 65 put will be worth $7.50 ($1.50 loss). The net of this is a $2.50 profit.
The PL chart below graphically shows where this trade will be profitable and at a loss.