With markets taking a bit of a breather here, iron condors could be worth taking a look at.
Iron condors can produce a return on stocks that stay within a specified range over the trade period. This can be a welcome change for buy and hold investors.
Today, we're going to look at an example on Apple stock.
An iron condor can be set up via 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.
Setting Up Apple Stock Trade
First, we take the bull put spread. Using the Oct. 18 expiry, we could sell the 205 put and buy the 200 put. That spread could be sold for around $0.45.
Then the bear call spread could be placed by selling the 250 call and buying the 255 call. This spread could be sold for around $0.45.
In total the iron condor will generate around $90 in premium for a block of 100 shares.
The profit zone ranges between 204.10 and 250.90. This can calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is $5 – $0.90 x 100 = $410.
Apple Stock Trade Could Return 22%
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 Apple stock makes a big move, 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 $90, so we could set a stop-loss at 1.5 times the premium, or around $135.
Apple stock is showing an IV percentile of 63%, which means the current level of implied volatility is higher than 63% of all readings in the last 12 months.
According to the IBD Stock Checkup, Apple stock is ranked No. 3 in its industry group. It has a Composite Rating of 89, an EPS Rating of 86 and a Relative Strength Rating of 85.
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
