Volatility is elevated at the moment and that can mean it's a great time for iron condors. We looked at an iron condor on United Airlines on Tuesday and Arista Networks is also worth considering for a similar trade today. Here's how to set up an iron condor on Arista stock on the premise that it will stay in a range.
Collecting Premium With High Implied Volatility
As a reminder, an iron condor uses a combination of a bull put spread and a bear call spread. Both of these bring in a credit. Since implied volatility is a component of option premium value, higher implied volatility leads to higher premiums.
Arista Networks is showing high implied volatility with a reading of 49.2% compared to a 12-month low of 29% and a 12-month high of 73.1%.
That gives ANET stock an IV percentile of 66% and an IV Rank of 46%. Not quite as high as our UAL trade, but still pretty good.
An iron condor range of profit is dependent on where you place your short strikes. High volatility means we can place our short strikes much further away from the market than we normally could.
Iron Condor For Arista Networks Stock
Let's look at how we might set up an iron condor on Arista Networks stock.
First, we take the bull put spread. Using the April 17 expiry, we could sell the 80 put and buy the 75 put. That spread could be sold for around 70 cents this morning.
Then the bear call spread. We can sell the 125 call and buy the 120 call. This spread could be sold for around 25 cents.
In total the iron condor will generate around $95 in premium, which is also our maximum profit on the trade. It might not seem like a lot, but with the wide range of profit, there's a higher probability of success.
Our short strikes define the range we think Arista Networks will trade in over the next several weeks. The 120 band is right around a recent resistance level from a couple of weeks ago. The lower band at 80 has a support level going back to September.
Profits And Losses
The maximum profit is our premium received of $95. For the maximum loss we subtract the premium received from the distance between the strikes. Since they are five wide, the maximum loss is 5 – 0.95 x 100 = $405.
If we take the premium ($95) divided by the maximum risk ($405), this iron condor trade has the potential to return 23% in less than two months.
The profit zone ranges between 79.05 and 120.95. This can be calculated by taking the short strikes and adding or subtracting the premium received. This is quite a wide range for a stock like Arista Networks.
Of course you could increase your profit potential by moving the strikes closer to each other. But the more narrow profit range means you have a reduced chance of success.
Managing The Trade
If price action stabilizes, then iron condors work well. However, if Arista Networks stock makes a big move, either above resistance or below support, the trade will suffer a loss.
One way to set a stop-loss for an iron condor is based on the premium received. In this case, we received $95, so we could set a stop equal to the premium of $95.
Note that Arista Networks reported earnings in mid-February, so this trade should have no earnings risk.
According to IBD Stock Checkup, ANET stock ranks No. 1 in its group and has a Composite Rating of 94 and a stellar EPS Rating of 98.
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 X/Twitter at @OptiontradinIQ
