With volatility on the rise, iron condor option trades could be back on the agenda.
Iron condors can produce a return on stocks that stay within a specified range over the trade period. Today, we're going to look at an example on Nvidia stock.
An iron condor can be set up via 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 Aug. 16 expiry, we could sell the 100 put and buy the 95 put. That spread could be sold for around $0.65.
Then the bear call spread could be placed by selling the 132 call and buying the 137 call. This spread could be sold for around $0.50.
Nvidia Stock Trade Generates $115 In Premium
In total the iron condor will generate around $1.15 in premium.
The profit zone ranges between 98.85 and 133.15. This can calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is 5-1.15 x 100 = $385.
Therefore, if we take the premium ($115) divided by the maximum risk ($385), this iron condor trade has the potential to return 30%.
If price action stabilizes, then iron condors will work well. However, if Nvidia stock makes a big move, the trade will suffer losses.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $115, so could set a stop loss at 1.5 times the premium, or around $170.
Nvidia Stock Volatility Elevated
Nvidia stock is showing an IV percentile of 76%. That means the current level of implied volatility is higher than 76% of all readings in the last 12 months.
According to the IBD Stock Checkup, Nvidia stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 98.
Nvidia is due to report earnings in late August, so this trade should have no earnings risk.
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
