Exxon Mobil could be a good candidate for an iron condor trade due to higher than normal volatility.
High volatility means iron condors become more attractive as option premiums increase.
When volatility is high, the iron condor can be placed further out-of-the-money, giving the trade a higher chance at success.
XOM stock is currently showing an IV percentile of 85%, which means the current level of implied volatility is higher than 85% of the readings in the last 12 months. The stock is forming a cup base.
Let's look at a potential iron condor on XOM stock.
Trade Combines Two Types Of 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 Oct. 21 expiry, we could sell the 80 put and buy the 75 put. That spread could be sold yesterday for around $0.50.
Then we do the bear call spread, which could be placed by selling the 115 call and buying the 120 call. This spread could be sold yesterday for around $0.30.
In total, the iron condor will generate around $0.80 per contract, or $80 of premium.
The profit zone ranges between 79.20 and 115.80. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are five-points wide, the maximum risk in the trade is 5 — 0.80 x 100 = $420.
Maximum Profit 19%, If Price Action Is Calm
Therefore, if we take the premium ($80) divided by the maximum risk ($420), this iron condor trade has the potential to return 19%.
If price action stays neutral, 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 $80, so we could set a stop loss equal to two times the premium, or a loss of around $160.
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 85 on the downside and 110 on the upside.
According to the IBD Stock Checkup, XOM stock is ranked No 8 in its industry group and has a Composite Rating of 97, an EPS Rating of 81 and a Relative Strength Rating of 96.
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
