With volatility on the increase, option premiums are elevated which could mean it’s a great time for iron condor trades.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor 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 percentile.
First, let’s look for stocks with a high implied volatility percentile. For this example, we will exclude any stocks with earnings within the next 20 days. Here is the screener setup.
And here are the results:
We can see that Dell Technologies (DELL), Palo Alto Networks (PANW), Nvidia (NVDA), Micron Technology (MU), Taiwan Semiconductor (TSM), Broadcom (AVGO) and Costco (COST) have a high IV Percentile, so let’s use some of those stocks in our Iron Condor Screener.
Here are the filters:
And these are the results:
Let’s evaluate three different iron condor trade ideas presented in the table above.
NVDA Iron Condor
Using the May 17 expiry, the trade would involve selling the $710 put and buying the $525 put. Then on the calls, selling the $895 call and buying the $1080 call.
The price for the condor is $17.34 which means the trader would receive $1,734 into their account. The maximum risk is $16,766 for a total profit potential of 10.34% with a probability of 75.0%.
The profit zone ranges between $692.66 and $912.34. This can be calculated by taking the short strikes and adding or subtracting the premium received.
AVGO Iron Condor
Another stock on our high implied volatility screener was Broadcom.
Let’s look at the first AVGO line item from our screener results. Using the May 17 expiration, the trade involves selling the $1150 put and buying the $920 put. Then on the calls, selling the $1380 call and buying the $1610 call.
The price for the condor is $21.05 which means the trader would receive $2,105 into their account. The maximum risk is $20,895 for a total profit potential of 10.07% with a probability of 74.6%.
The profit zone ranges between $1,128.95 and $1,401.05
META Iron Condor
Meta was another stock with both a high IV Percentile and IV Rank from our initial screener.
The first META example from our screener uses the May 24 expiry and involves selling the $395 put and buying the $310 put. Then on the calls, selling the $480 call and buying the $565 call.
The price for the condor is $7.76 which means the trader would receive $776 into their account. The maximum risk is $7,724 for a total profit potential of 10.05% with a probability of 74.3%.
The profit zone ranges between $387.24 and $487.76.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.
One way to set a stop loss for an iron condor is closing the trade if the loss is greater than 1.5 times the premium received. The first example on NVDA received $1,734 in premium, so a stop loss could be set if the trade is down $2,600.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and its 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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
