Over the recent weeks, my premise for neutral to negative summer flow still holds as the theme over the broad landscape. Meanwhile, crosscurrents hitting the stock market mean we can expect broad ranges in price action, so let's look at Cintas as it comes into an important test of support. Today's column spies a short iron condor trade in CTAS stock.
The crosscurrents of news continue with Amazon announcing a surge of new holiday hiring and FedEx issuing upward guidance.
Plus, word of surprise weekly jobless claims sits squarely across several consecutive downward revisions by the Bureau of Labor and Statistics (BLS).
This week has proved no different. And as with every trading cycle every year, I learn something else about traders and markets. The takeaway here, at this time, is a lesson I learn repeatedly. That is, time can be my friend, and I must use the passage of time to extract money from the market.
Cintas is likely to be impacted by reductions in the labor force. The company provides uniform programs sold to more than 1 million customers. So, CTAS stock is likely to suffer from sideways motion inside the current market conditions.
Meanwhile, the company's strength, breadth and depth of business customers also represent a positive that may keep the price of CTAS stock in a drifting space for the last quarter of the year.
CTAS Stock Today: Setting Up The Trade
Consider these details of a short iron condor with a longer expiration:
- Sell to open 1 CTAS Dec. 15-expiring call with a 510 strike price
- Buy to open 1 CTAS Dec. 15 530 call
- Sell to open 1 CTAS Dec. 15 500 put
- Buy to open 1 CTAS Dec. 15 480 put
This iron condor will create a credit event of $14.85 received per set of options contracts, based on recent trading.
As this trade features a pair of call spreads, it features a break-even high price of 524.85 (the option strike plus the collected premium from the sold call at 510) and a break-even low price of 485.15 (the option strike minus the collected premium from the 500 strike call).
CTAS Stocks Makes The Long-Term Leaders Watchlist
Defending The Trade
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself in the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD. The option toolbox also gives me a great advantage studying the many ways to extract money and position myself in the market.
Selling an iron condor is a neutral position that surmises price action will be somewhat sideways during the time the iron condor is in play.
Options sellers are positioned to win in two ways. Either the stock does nothing. Or the stock moves within the ranges, so we use this concept to minimize the risk of market exposure.
Trade Management: Identifying Key Chart Levels
Weekly support sits near 480 and 520 as near-term resistance. Please see MarketSmith for the clean lines showing this range. But our goal with the iron condor is to simply allow theta or time decay to allow us to be paid for the time in the chart.
Let's consider these scenarios for the CTAS short iron condor:
- The stock grinds lower but does not break 485 for more than three days. This gives bottom pickers time to engage in support behavior. If it does not occur, we must leave the trade.
- CTAS stock grinds higher but does not break 525 for more than three days. This gives top pickers time to engage in resistance behavior. If it does not occur, we must leave the trade.
- Cintas holds these ranges until we have 30-40 days left in the position. This is the sweet spot for our exit. Why? As the closer we get to expiration, the more sensitive options get toward pricing and volatility. Also, this opens the door to price action that can be unfavorable to the option sellers.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
