Amazon rose 1.99% yesterday, the first day after its 20-to-1 stock split. Option traders waited a long time for this stock split to occur. It makes Amazon options much easier to trade.
Today, we'll look at a simple example of an iron condor trade on AMZN stock.
Iron Condor Setup For Amazon Stock
An iron condor is a combination of a bull put spread and a bear call spread.
They are best placed when a trader has a neutral outlook on the stock and does not expect volatility to rise.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
For Amazon stock, a bull put spread might sell the 110 put and buy the 105 put with a July 15 expiry. That spread sold yesterday for around $0.75.
Then a bear call spread where you sell a 140 call and buy the 145 call, with the same expiration, sold yesterday for around $0.70.
In total the iron condor on Amazon stock generated around $1.45 in premium.
Risk And Return For The Trade
The max profit for an iron condor is the premium received of $145. The profit zone ranges with Amazon stock trading from 108.55 to 141.45 at expiration.
Calculate this by taking the short strikes and adding or subtracting the premium received. With both spreads having strikes $5 wide, the maximum risk in the trade is 5 – 1.45 x 100 = $355.
Therefore, if we take the premium ($145) divided by the maximum risk ($355), this iron condor trade has the potential to return 41% in just over a month.
If price action stabilizes, then iron condors will work well. However, if AMZN stock continues to bounce around, 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 $145 so could set a stop loss at 1.5 times the premium, or around $220.
According to IBD Stock Checkup, Amazon stock has a Composite Rating of 43, an EPS Rating of 82 and a Relative Strength Rating of 29.
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 Twitter at @OptiontradinIQ
