Powell Industries has presented a beautiful chart over the past year and a half. It looks poised for tremendous upside in the long run. Therefore, let's consider a short iron condor spread trade using options in POWL stock.
A member of IBD's electrical power and equipment industry group, Powell ranks first overall and holds an excellent IBD Composite Rating. According to IBD Stock Checkup, Powell's Composite is a 99.
POWL stock initially cruised out of a large double-bottom base in the week ended Dec. 9, 2022. Shares in the small cap cleared a 27.99 prime entry point, then rallied 69.5% in the next three months before stepping into its next base, an eight-week cup without handle that formed from the week ended March 10 to early May of 2023.
That double bottom also formed a handle, offering a slightly lower buy point at 27.46.
Earlier this week, Powell shares hit a high of 209.14, up 647% from the initial buy point in the double bottom.
Watch For Price Drifts
This stock is fairly far from its key moving averages, so a drift or pause in price seems plausible as we move into the summer months. Indeed, following a big sell-off in Dell Technologies after its earnings report late Thursday, electrical equipment and data-center-related stocks suffered sharp losses on Friday.
Nevertheless, amid volatile moves in the stock market today, it continues to be an environment that rewards us for sticking with strength.
In one of my latest reads on Investors.com, the treasure trove of highfliers was filled with solid choices for holdings. The key event? How we might handle our latest positions with risk at top of mind. My mindset remains that we have unsettled motion ahead. Hence, sideways price behavior of the indexes over the summer seems most likely.
Sideways motion means that we lean on the iron condor strategy. We allow time to pay us while we wait for breakout formations. That said, it's important to make sure we set alerts at the edges of the prices that make up the backbone of these short iron condors so that we can manage our risk.
POWL Stock: The Options Setup
The short iron condor spread is a neutral position. This trade estimates prices in POWL stock will sit in a range. This allows us to capture erosion in price from the passage of time, delivering steady gains. The option chains are light in terms of trading volume. So, you might have to leave this one in the queue to fill.
Consider using a GTC (good 'til cancel) order so that it gives market makers a chance to take the position onto their books.
Let's set up the short iron condor spread in POWL stock in this manner:
- Sell to open one POWL call option expiring Aug. 16 with a 240 strike price
- Buy to open one POWL Aug. 16 250 call
- Sell to open one POWL Aug. 16 170 put
- Buy to open one POWL Aug. 16 160 put
Total credit in this trade is $4.95 per share per set of contracts, based on recent trading before Friday's sharp drop. This gives us a break-even cost for POWL stock at 244.95 on the high side and 165.05 on the low side.
The ideal strategy result gives us two choices to exit the trade. One, sell the short iron condor spread once it carries an acceptable profit, through either price or time erosion, or both. For me, an acceptable profit stands around 50%. Two, sell the short iron condor spread once it hits your loss threshold as determined by personal risk. And three, to manage volatility, make sure you set an alert on the short strikes of the iron condor.
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Understanding The Short Iron Condor Spread
The goal of taking the short iron condor, which delivers a credit to us, is to allow time decay to work for us as we potentially watch the price action sit still while time decay (theta) increases our gains over time.
Options sellers are positioned to win in two ways — the stock does nothing, or the stock moves within the ranges relative to the strategy. So we use this concept to minimize the risk of market exposure.
The monthly resistance zone has been breached and sits near its current highs at $200 and a Fibonacci expansion into $240. The support sits near $180 to $170. These two levels give us room for prices to move around — to dip and then rise again — and those price lines also give us those short strikes on our spreads.
Let's also consider these scenarios for the short iron condor spread in POWL stock:
- POWL stock grinds higher or lower into our risk thresholds. We exit the trade at our risk parameters.
- Stock stays in a range and we gain slowly over time and we close the position with 10 days before expiration. This is the sweet spot for trading options, in general.
- POWL stock grinds higher or lower into our profit thresholds. We exit the trade at our profit targets.
- Pay attention to the alerts if they get triggered. Give the chart a day or two to confirm the move into the danger zone. If we see price action continue out of our ranges, we need to consider leaving the trade.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
