The nuclear energy patch is heating up and one of the names garnering attention is Oklo. With a big spike in institutional ownership, Oklo stock seems like an under-the-radar stock that's worth watching.
As it consolidates in a somewhat overheated space, one could reasonably expect it to hold within a range, albeit a large range. In consideration of its price-to-book ratio, if the chart drops to $15, it could be a potential addition to a portfolio.
Whenever I'm thinking of things holding in a range, I lean on the trusty iron condor. As gyrations are likely to occur before the next potential rise we'll use a twist on the iron condor that will allow for wider ranges and more bullish potential.
Oklo Stock Today: Iron Condor With A Twist
When we position with short iron condors, we attempt to collect time decay while a chart bases or settles into a new direction. As always, we assume that we don't know the direction but are able to estimate the magnitude of the move using the ATR (average true range, measured on the weekly chart). We also lean on the implied moves that market makers price in over the months ahead.
According to IBD Stock Checkup, Oklo stock holds a 68 Composite Rating, a 7 Earnings Per Share Rating, and a 99 for Relative Strength. Granted, the ratings aren't stellar but the chart and story are compelling.
Let's look at a trade structure we can use for Oklo. A short iron condor consists of two spreads: a short call spread and a short put spread. Together they define a range of motion that we estimate the price action will not exceed. We'll use that same basic structure with a little twist. I'll use twice as many put spreads in this case:
- Buy to open one OKLO Jan. 17-expiring 40 call
- Sell to open one OKLO Jan. 17 35 call
- Sell to open two OKLO Jan. 17 17.50 put
- Buy to open two OKLO Jan. 17 12.50 put
Why double up on the put spread? Two reasons:
- The chart has significant bullish potential and I want to collect more premium on the bullish side of the spread — the short put spread.
- If it comes into lower levels, I have the opportunity to be put to the stock at a significant discount.
At this writing the credit received is $2.50 per share. This represents the maximum profit we can collect on the trade. With this kind of position, we collect a premium and as this premium erodes, we secure that revenue from the position.
Risk Calculation
Calculate maximum risk in the following way. We start with the distance between the strikes. Here they are both the same at $5 but our short put spread holds a wider risk because we sold twice as many. Therefore we'll calculate that risk separately.
On the call side $5 minus the credit we collect of $2.50 = $2.50. On the put side $10 minus the $2.50 credit collected = $7.50.
Swing Trader Weekly Update: Why Now Is The Time To Be Aggressive
Often, the question gets posed: Why take a trade where the risk is often more than twice the size of the reward?
The answer: The probability of the short iron condor with strikes far out of the money (meaning far away from the price of the stock currently) returning gains is often as much as nine times more likely than the long iron condor.
In the current case, we are looking at a probability that the short iron condor delivers gains is more than seven times as likely. So, we make the trade on the side of probabilities, rather than the possibility of outsize gains. Because of my bullish bent, doubling up on the put spread gives me an extra $1 in premium. Yes, the risk is doubled too, but the odds are still favorable.
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.
Trade Management
Now, let's identify key chart levels. Oklo stock sits near its highs in a market that may very well see a Santa Claus rally. I chose a short call strike more than 40% from current prices, but if volatility hits the market from any other kind of exogenous shock we're prepared for that too. We have the choice for a breakeven near $15 if we are put the stock (strike of $17.50 – $2.50 premium collected). That also give us a 40% downside range.
The strategy result provides three choices to exit the trade.
- Buy back the iron condor once it gets to an acceptable profit margin for you. I customarily look for 30%-60% profit for these kinds of trades in the current environment of volatility.
- Buy back the iron condor once it hits a loss threshold as determined by personal risk. This will happen with extreme movement. I customarily look at about 65%; although depending on my size, I will choose 50%.
- Buy back the spreads into the week before expiration, if all is going well and you have decided to hold the trade closer to the end of expiration. I have had many a trade go sideways, taking it down to the wire and not capturing gains, so I do not advise this.
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 X at @AnneMarieTrades
