We are currently sitting in a customarily volatile time in the markets and will likely be here for about 30 days or so. Therefore, let's consider Constellation Energy and how a short iron condor in Constellation Energy stock would work out.
I am looking for strong companies that have built an aggressive run-up and are now fading in price. Such stocks are likely going to test support regions on the chart and near weekly congestion levels.
Why choose an energy play such as Constellation Energy stock? Traders expect its strength will hold in the longer term. Although gyrations will be common, we can anticipate the short iron condor trade in options to create opportunities for income generation. How? By selling premium.
Understanding The Short Iron Condor
A short iron condor consists of a short call spread and a short put spread. Combined, they deliver higher income generation while the stock ideally sits in a channel.
When we position with short iron condors, we attempt to collect time decay while a stock forms a base or settles into a new direction. As always, we assume that we don't know the direction but are able to estimate the magnitude of the move using ATR (average true range, measured on the weekly chart) and implied moves that market makers have priced into the move over the months ahead.
Constellation Energy Stock Today
Let's introduce the setup:
- Sell to open one CEG April 17-expiring call with a 280 strike price
- Buy to open one CEG April 17 300 call
- Sell to open one CEG April 17 220 put
- Buy to open one CEG April 17 200 put
At the time of this writing, we would have received a credit of $8.45, or $845 per set of contracts. This represents the maximum profit we will collect.
With this kind of position, we collect a premium up front, and as this premium erodes, we can collect revenue from the position. For this iron condor, the breakeven price near upside resistance stands at 288.45. the trade's breakeven price near technical support is at 211.55.
Calculate maximum risk exposure the following way: distance between the spread of $20 less the collected premium of $8.45, or $11.55. Maximum loss stands at $1,155.
If the market fades further on Friday into end-of-the-month portfolio balancing, this short iron condor could potentially give greater premiums to the patient seller.
Why take a trade where the risk is often more than the size of the reward? The answer: the probability of the short iron condor with strikes far out of the money (meaning far away from the price of the stock currently) returning a gain is often as much as nine times more likely than the long iron condor.
In the current case of Constellation Energy stock, I see the probability of the short iron condor delivering gains as more than five times as likely, on average. So, we decide to take trade for reason of probabilities, rather than the possibility of outsize gains.
Constellation Energy Stock: Key Levels
Constellation Energy broke through a strong area of resistance to form new highs as the year began. Also, at one point, CEG jumped more than 20% past a three-month base with a buy point of 288.75 before it and the market began serious gyrations.
Constellation Energy stock is now on its way to possibly retest a breakout region on its chart. I see heavy price congestion near $220. This price level presents potential support. Upside resistance sits just above 290, and the concept of "heavy congestion" suggests we may have trouble fighting through there.
The strategy result provides three choices to exit the trade. One, buy back the short iron condor once it gets to an acceptable profit margin for you. I customarily look for 50% to 70% profit for these kinds of trades. Two, buy back the iron condor once it hits your loss threshold as determined by personal risk. This will happen with extreme movement. I customarily look at about 30%, although depending on my position size, I will choose 50%.
Finally, hold the iron condor into expiration week before covering, However, I would rarely recommend this choice as prices can move quickly against you.
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Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." You can find her on X at @AnneMarieTrades, Sirius Business Radio, Benzinga Financial News and the Investors Business Daily website www.investors.com
