International Business Machines reported earnings Monday and has been holding up well compared with the general market. Despite that, volatility in IBM stock remains elevated due to broad market nervousness.
High volatility means iron condors become more attractive, with many stocks seeing the highest implied volatility (IV) readings in the past 12 months.
IBM stock is currently showing an IV Rank of 38% and an IV Percentile of 83%.
When volatility is high, you can place the iron condor further out-of-the-money, giving the trade a higher chance at success.
Let's look at an example using IBM stock.
Iron Condor Combines Bull, Bear Spreads
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the March 18 expiry, we could sell the 120 put and buy the 115 put. Investors could sell that spread Wednesday for around $0.60 a share.
Then the bear call spread could be placed by selling the 145 call and buying the 150 call. This spread could be sold Wednesday for around $0.60 as well.
In total, the iron condor will generate around $1.20 per 100 share contract, or $120 of premium.
The profit zone ranges between 118.80 and 146.20. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 — 1.20 x 100 = $380.
Therefore, if we take the premium ($120) divided by the maximum risk ($380), this iron condor trade has the potential to return 31.57%.
If price action stabilizes, then iron condors will work well.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $120, so we could set a stop loss at 1.5 times the premium, or a loss of around $180.
Setting Exit Level On IBM Stock
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 125 on the downside (around Monday's low) and 140 on the upside (near a resistance area).
IBM stock is ranked No. 17 in its industry group and has a Composite Rating of 72, an EPS Rating of 53 and a Relative Strength Rating of 78.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
