Taiwan Semiconductor is showing high implied volatility with a reading of 40.73% compared to a 12-month low of 26.13% and a 12-month high of 60.02%.
That gives TSMC stock an IV percentile of 53% and an IV rank of 43%.
High volatility can mean it's a great to time trade iron condors, because we can place our short strikes much further away from the market than we normally could.
Let's look at how we might set up an iron condor on Taiwan Semiconductor stock.
An iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using the Feb. 21 expiry, we could sell the 185 put and buy the 180 put. That spread could be sold for around $0.75 late Tuesday.
Then the bear call spread could be placed by selling the 227.50 call and buying the 232.50 call. This spread could be sold for around $0.50.
TSMC Stock Trade Generates $125
In total, the iron condor will generate around $125 in premium.
The profit zone ranges between 183.75 and 228.75. You calculate it by taking the short strikes and adding or subtracting the premium received.
This is quite a wide range for a stock like Taiwan Semiconductor.
Because both spreads are 5 wide, the maximum risk in the trade is 5-1.25 x 100 = $375.
Therefore, if we take the premium ($125) divided by the maximum risk ($375), this iron condor trade has the potential to return 33.33%.
If price action stabilizes, iron condors will work well. However, if Taiwan Semiconductor makes a big move, the trade will suffer losses.
Managing TSMC Stock Option Trade
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $125, so could set a stop equal to the premium of $125.
Note that Taiwan Semiconductor reported earnings in mid-January, so this trade does not have the risk of an earnings-related move.
According to the IBD Stock Checkup, TSMC stock is ranked No. 1 in its industry group. It has a Composite Rating of 92, an EPS Rating of 98 and a Relative Strength Rating of 90.
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
