Volatility is on the rise which could mean it’s a good time to be on look lookout 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. We’re in the thick of earnings season, so many stocks will be showing high IV.
We can see that Pfizer (PFE) has both a high IV Percentile and IV Rank, so let’s use that in our Iron Condor Screener.
Here are the filters:
And these are the results:
PFE Iron Condors
Let’s take a look at the first line item.
Using the January 26 expiry, the trade would involve selling the $28 put and buying the $26 put. Then on the calls, selling the $30 call and buying the $32 call.
The price for the condor is $0.60 which means the trader would receive $60 into their account. The maximum risk is $140 for a total profit potential of 42.86% with a probability of 56.10%.
The profit zone ranges between $27.40 and $30.60. This can be calculated by taking the short strikes and adding or subtracting the premium received.
VRTX Iron Condors
The third stock on our high implied volatility screener was Vertex Pharmaceutic (VRTX). Here are the iron condor screener results for VRTX:
Let’s look at the first line item using the February 16 expiry. The trade involves selling the $400 put and buying the $370 put. Then on the calls, selling the $430 call and buying the $460 call.
The price for the condor is $8.60 which means the trader would receive $860 into their account. The maximum risk is $2,140 for a total profit potential of 40.19% with a probability of 44.3%.
The profit zone ranges between $391.40 and $438.60. This can be calculated by taking the short strikes and adding or subtracting the premium received.
VRTX is due to report earnings towards the end January, so these iron condors would have exposure to earnings.
LLY Iron Condors
LLY is another stock with both a high IV Percentile and IV Rank from our initial screener.
Here are the iron condor screener results for Eli Lilly:
The first example uses the January 26 expiry and involves selling the $590 put and buying the $535 put. Then on the calls, selling the $645 call and buying the $700 call.
The price for the condor is $10.01 which means the trader would receive $1,001 into their account. The maximum risk is $4,499 for a total profit potential of 22.25% with a probability of 63.3%.
The profit zone ranges between $655.01 and $655.01.
LLY earnings are set for early February.
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 PFE received $60 in premium, so a stop loss could be set if the trade is down $90.
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.
