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Alphabet (GOOGL) is stuck in a trading range at the moment and that could mean it’s a good time for an iron condor trade.
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.
GOOGL IRON CONDOR
Traders that think GOOGL stock might stay in the current range over the next few weeks could look at an iron condor.
As a reminder, 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 May 19 expiry, we could sell the 100 put and buy the 95 put. That spread could be sold yesterday for around $0.45.
Then the bear call spread, which could be placed by selling the 115 call and buying the 120 call. This spread could also be sold yesterday for around $0.45.
In total, the iron condor will generate around $0.90 per contract or $90 of premium.
The profit zone ranges between 99.10 and 115.90. 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 – 0.90 x 100 = $410.
Therefore, if we take the premium ($90) divided by the maximum risk ($410), this iron condor trade has the potential to return 21.95%.
If price action stabilizes, then iron condors will work well. However, if GOOGL stock makes a bigger than expected move, the trade will suffer losses.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 72% Buy with a strongest short term outlook on maintaining the current direction.
GOOGL rates as a Strong Buy according to 30 analysts with 4 Moderate Buy ratings and 1 Hold rating.
Alphabet has evolved from primarily being a search-engine provider to cloud computing, ad-based video and music streaming, autonomous vehicles, healthcare providers and others. In the online search arena, Google is a monopoly with more than 94% of the online search volume and market. Over the years, the company has witnessed increase in search queries, resulting from ongoing growth in user adoption and usage, primarily on mobile devices, continued growth in advertiser activity, and improvements in ad formats. The company is gaining market share in the cloud-computing, driven by continued strength in Google Cloud Platform and Google Workspace. Alphabet also enjoys a dominant position in the autonomous vehicles market, thanks to Waymo's relentless efforts. Also, it has bolstered its footprint in the healthcare industry with its life science division, Verily.
Conclusion And Risk Management
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $90, so we could set a stop loss equal to the premium received, or a loss of around $90.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 105 on the downside and 110 on the upside.
One downside with the trade is that GOOGL is currently showing a low IV Rank of just 15%.
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.
