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 Novo Nordisk (NVO), Amgen (AMGN), Delta Airlines (DAL), Microstrategy (MSTR), Adobe (ADBE), Broadcom (AVGO), Tesla (TSLA), Coinbase (COIN) 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.
COST Iron Condor
Using the December 6 expiry, the trade would involve selling the $890 put and buying the $840 put. Then on the calls, selling the $990 call and buying the $1040 call.
The price for the condor is $3.94 which means the trader would receive $394 into their account. The maximum risk is $4,606 for a total profit potential of 8.55% with a loss probability of 21.1%.
The profit zone ranges between $886.06 and $993.94. This can be calculated by taking the short strikes and adding or subtracting the premium received.
ADBE Iron Condor
Another stock on our high implied volatility screener was Adobe.
Let’s look at the first ADBE line item from our screener results. Using the December 6 expiration, the trade involves selling the $460 put and buying the $445 put. Then on the calls, selling the $535 call and buying the $550 call.
The price for the condor is $1.24 which means the trader would receive $124 into their account. The maximum risk is $1,376 for a total profit potential of 9.01% with a loss probability of 19.7%.
The profit zone ranges between $458.76 and $536.24.
DAL Iron Condor
Delta Airlines was another stock with both a high IV Percentile and IV Rank from our initial screener.
The first DAL example from our screener uses the December 20 expiry and involves selling the $56 put and buying the $50 put. Then on the calls, selling the $74 call and buying the $80 call.
The price for the condor is $0.56 which means the trader would receive $56 into their account. The maximum risk is $544 for a total profit potential of 10.29% with a loss probability of 22.9%.
The profit zone ranges between $55.44 and $74.56.
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 COST received $394 in premium, so a stop loss could be set if the trade is down $590.
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.
