Google search engine operator Alphabet ramped up more than 4% for the week and is poised for a fourth straight weekly advance. So, let's check out a trusty iron condor trading the wider ranges in Google stock.
We are staring down the largest four-day run of 2024 post-election. With upward trajectories holding steady, it is interesting to note Google (GOOGL) still sits below its high of 193.31. Some uncertainty with the advertising and media companies in the next administration seems to be showing in the move (or lack thereof).
Going back to Google stock, future gyrations are likely to occur before the chart faces higher lines of resistance potentially ahead.
Google Stock Today: The Trade
When we position with short iron condors, we attempt to collect time decay while a chart bases 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 the ATR (average true range, measured on the weekly chart) and the implied moves that the market makers have priced into the move over the months ahead.
According to IBD Stock Checkup, Google stock holds a strong 94 Composite Rating, a 97 Earnings Per Share Rating, and a 71 for Relative Strength. Alphabet is the class A stock of the tech titan and is also highly liquid. GOOG represents the class C shares and holds a different level of voting rights vs. the class A stock.
Let's now introduce the trade structure using the GOOG ticker. A short iron condor in Google stock consists of two spreads: a short call spread and a short put spreads that define a range of motion that we estimate the price action will not exceed:
- Sell to open one GOOG Jan. 17-expiring 200 call
- Buy to open one GOOG Jan. 17 205 call
- Sell to open one GOOG Jan. 17 170 put
- Buy to open one GOOG Jan. 17 165 put
Recently, the credit received was $1.43 per share. This serves as the maximum profit we will collect overall, or $143 per set of options. As this premium erodes, we collect revenue from the position.
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Risk Calculation
Calculate maximum risk in the following way. Take the distance between strikes (here they are both the same at $5 but it could be the case that one spread holds a wider risk than another and the structure remains an iron condor). Then subtract the credit we collect ($5 – $1.43) to get $3.57, or $357 per set of contracts.
Often, the question gets posed: Why take a trade where the risk is often more than twice the size of the reward?
The answer: Probability of the short iron condor with strikes far out of the money (meaning far away from the current price of Google stock) returning gains often reaches as much as nine times more likely than the long iron condor. And, in the current case, the probability of the short iron condor delivering gains appears eight times as likely. So we make the trade on the side of probabilities, rather than the possibility of outsized gains.
Stock hunting using fundamental and price strength within The IBD Methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Trade Management
Now, let's identify key chart levels. Postelection, Google stock is still well below recent highs and could extend to this area near $200 but is likely to return to the value area near $190 before continuing (as we assume volatility in the near term may be ahead). We see the value area and prior breakout line at or near $170 – and so estimating we stay in this range gives me the short strikes chosen.
The strategy result provides three choices to exit the trade.
One, buy back the iron condor once it gets to an acceptable profit margin for you. I customarily look for 30%-60% profit for these kinds of trades in the current environment of volatility. Two, buy back the iron condor once it hits a loss threshold as determined by personal risk. This will happen with extreme movement. I customarily look at about 65%; although depending on my size, I will choose 50%. And three, buy back the spreads into the week before expiration, if all is going well and you have decided to hold the trade closer to the end of expiration. I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this.
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." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
