Iron condors can produce a return on stocks that stays within a specified range over the trade period.
This can be a welcome change for buy-and-hold investors who are reliant on markets always going up. Today, we're going to look at an example on Moderna stock.
An iron condor on Moderna 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 July 19 expiry, we could sell the 120 put and buy the 115 put. That spread could be sold for around $0.60 a share.
Then the bear call spread can be placed by selling the 180 call and buying the 185 call. This spread could be sold for around $0.50.
Profit Zone For Moderna Stock Iron Condor
In total the iron condor will generate around $1.10 in premium.
The profit zone ranges between 118.90 and 181.10. 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 5-1.10 x 100 = $390.
Therefore, if we take the premium ($110) divided by the maximum risk ($390), this iron condor trade has the potential to return 28.2%.
Moderna has been volatile in the past couple of weeks. Moderna stock is showing an IV percentile of 64%. That means the current level of implied volatility is higher than 64% of all readings in the last 12 months.
If price action stabilizes, then iron condors will work well. However, if Moderna stock makes a big move, the trade will suffer losses.
Exit Strategy For Moderna Stock Trade
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $110, so we could set a stop loss at 1.5 times the premium, or around $165.
According to the IBD Stock Checkup, Moderna stock is ranked number 92 in its industry group. It has a Composite Rating of 57, an EPS Rating of 5 and a Relative Strength Rating of 94.
Moderna is due to report earnings in early 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
