An iron condor is an income trade that profits when a stock stays within a specified range over the course of the trade. One key factor to look for when trading iron condors is a stock with high implied volatility. One stock that meets that criterion is Nike Inc (NYSE:NKE).
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NKE is currently showing an implied volatility reading of 31.7%, significantly higher than the 19.6% we saw back in August.
Traders thinking that volatility might drop while prices stabilize could look at an iron condor.
When volatility is high, the iron condor can be placed further out-of-the-money giving the trade a higher chance at success.
Let’s Look At An Example Using Nike Stock
An iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the October 15 expiry, we could sell the 145 put option and buy the 140 put. That spread could be sold on Friday for around $0.70.
Then the bear call spread, which could be placed by selling the 170 call option and buying the 175 call. This spread could be sold on Friday for around $0.55.
In total, the iron condor will generate around $1.25 in premium.
The profit zone ranges between 143.75 and 171.25. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.25 x 100 = $375
Therefore, if we take the premium ($125) divided by the maximum risk ($375), this iron condor trade has the potential to return 33.33%.
If price action stabilizes, then iron condors will work well. However, if NKE stock continues to bounce around, the trade will suffer losses.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $125, so we could set a stop loss at 1.5 times the premium or a loss of around $187.
Iron Condors are one of the best option strategies. I’ve been in the options game since 2004, and they still form the core of my trading strategy.
We will be running a free webinar on Thursday, September 30 – Generating Income Using Covered Calls And Credit Spreads – You can register here.
Article By Gavin McMaster, The Financially Independent Millennial
*Disclaimer: All information and data in this article is solely for informational purposes. The information herein is based solely on my personal opinion and experience. All investments hold inherent risk, and the information provided should not be interpreted as any kind of guidance, recommendation, offer, advice, or suggestion. Any ideas and strategies discussed on this channel should not be implemented without first considering your financial and personal circumstances or without consulting a financial professional.