short iron condor is an income strategy that aims to profit when a stock stays within a specified range over the course of the trade. The trade is composed of four options with the same expiration:
- A long put far out of the money
- A short put closer to the money
- A long call far out of the money
- A short call closer to the money
The maximum profit is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Traders should have a neutral outlook on the stock and ideally look to enter when the stock has a high implied volatility rank.
Let’s take a look at Barchart’s Short Iron Condor Screener for December 4th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as COIN, PLTR, TSLA, MSTR, NVDA and AMZN.
Let’s look at the first line item – an iron condor on Coinbase.
Using the December 20th expiry, the trade would involve selling the $200 put and buying the $150 put. Then on the calls, selling the $400 call and buying the $450 call.
The price for the condor is $1.98 which means the trader would receive $198 into their account. The maximum risk is $4,802 for a total profit potential of 4.1% with a loss probability of just 6.4%.
The profit zone ranges between $198.02 and $401.98. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The Barchart Technical Opinion rating is an 88% Buy with a strongest short term outlook on maintaining the current direction.
COIN is showing an IV Percentile of 33% and an IV Rank of 33.56%. The current level of implied volatility is 75.04% compared to a 52-week high of 104% and a low of 60.41%.
Coinbase has already reported Q3 earnings, so this trade should not have earnings risk if held to expiration.
The next Iron Condor we will look at is on the third line using Tesla (TSLA) for the December 20th expiration.
This example involves selling the $275 put and buying the $240 put, then selling the $415 call and buying the $450 call.
The maximum profit potential is $135 with maximum risk of $3,365 and a loss probability of 6.7%. The total profit zone ranges between $273.65 and $416.35.
The Barchart Technical Opinion rating is a 100% Buy with a strongest short term outlook on maintaining the current direction.
TSLA is showing an IV Percentile of 51% and an IV Rank of 29.68%. The current level of implied volatility is 51.08% compared to a 52-week high of 76.09% and a low of 40.53%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the COIN example can lose is $4,802 while the TSLA condor has risk of $3,365.
For each trade consider setting a stop loss of 25-30% of the max loss.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.
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.
