Amgen has been under pressure in recent days. Amgen stock faces a "big unknown risk" with their obesity shot. As a result, implied volatility has spiked to 52%. That's much higher than the previous high for implied volatility of 32% and puts the implied volatility (IV) percentile at 100% and an IV Rank of 100%.
High volatility makes for good iron condors setups. We can place our short strikes much further away from the market than we normally could giving us a wider profit range. Let's look at how we might set up an iron condor on Amgen stock.
Amgen Trade Offers Wide Profit Range
An iron condor uses a combination of a bull put spread and a bear call spread.
First, let's take the bull put spread. Using the Dec. 20 expiry, selling the 245 put and buying the 240 put produced a credit of 1.10 this morning.
For the bear call spread, selling the 325 call and buying the 330 call brought in 65 cents. The two credit spreads together generated $175 in premium.
The profit zone ranges between 243.25 and 326.75. Taking the short strikes and adding or subtracting the premium received gives you the profit range. With these numbers, that puts the profit range between 243.25 and 326.75. This is quite a wide range for a stock like Amgen.
Tidy Return If Stock Doesn't Move
As both spreads are 5 wide, the maximum risk in the trade is 5 - 1.75 x 100 = $325. As for the maximum profit, that is simply the premium received of $175.
Therefore, if we take the premium ($175) divided by the maximum risk ($315), this iron condor trade has the potential to return 54%.
If price action stabilizes, then iron condors will work well. However, if Amgen stock makes a big move in either direction, 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 $175 so could set a stop equal to the premium of $175.
According to the IBD Stock Checkup, Amgen stock is ranked No. 64 in its industry group. It has a Composite Rating of 59, an EPS Rating of 73 and a Relative Strength Rating of 23. Though the ratings our poor, that's OK as this is a neutral play as opposed to bullish. If the stock doesn't move beyond the short strikes, the options expire worthless and you keep the entire premium.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
