I suppose the theme for anyone disappointed with Tuesday’s election result is this: when life gives you lemons, make lemonade. In the case of a second administration of President-elect Donald J. Trump, we’re going to get a heavy dose of incredibly draconian (and thus controversial) immigration policies. As such, the market has been aggressively focused on private prisons such as Geo Group (GEO).
To be clear, I don’t want to get into a political or ideological discussion on the merits of private prisons. Suffice to say, it is a scandal-ridden industry as the profit motive may put both inmates and correction officers at risk. However, it’s unignorable that under another Trump administration, GEO stock will likely become wildly relevant, as evidenced by its 78% surge this past week.
From a trading standpoint, one factor to watch is the implied volatility (IV) ranking. Currently, the average IV stands at just under 64%, which is quite high. However, compared to its historical volatility (HV) of 110.36%, the projected forward movement of GEO stock is relatively low. What’s more, based on the previous trend of IV rank — a feature available to Barchart Premier members — it’s clear that relative IV has sharply declined.
That’s not surprising. In November heading into the final hours of voting, GEO’s average IV rank shot up to 89.92%. However, in the subsequent post-election sessions, the average IV rank slipped sharply to 26.08%. Basically, the market isn’t projecting GEO stock to move as much anymore, especially given that the major catalyst — Tuesday’s election — is over.
It’s not that much of a stretch to assume that volatility may continue to fade or at least stay muted as investors digest the broader implications of the election. While I wouldn’t want to take a directional bet, one could use the short iron condor to benefit from the possible consolidation.
Strategizing the Iron Condor Play for GEO Stock
At the heart of the matter, the short iron condor represents a credit-based strategy that the target security will trade within a defined range. Put another way, if you anticipate IV to decline or stay steady, the iron condor could be an effective strategy. The trade allows the security to rise or to decline by a certain magnitude. So long as it stays within the boundaries, you can collect a profit.
Structurally, the short iron condor represents a combination of a bull put spread and a bear call spread. Because of this layout, the target security cannot exceed its defined upper and lower boundaries. Ideally, the asset should stay inside the inner strike prices of the condor to keep the maximum income received. Since it’s a credit-based strategy (hence the term “short”), you would start from a cash inflow position.
Once you’ve decided that the short iron condor is your preferred approach, the next step is to find the condor that works for your risk-reward profile. It’s important to establish a baseline strategy — a condor that best “fits” the expected market movement of the target asset. To extract this figure, we can reverse engineer the market’s nominal expectation of volatility through stochastic analysis.
Here’s a quick cheat code. Just multiply the below three metrics to get the nominal expected volatility:
- Share price of the asset, in this case $25.36.
- The IV of the options chain you’re targeting.
- Time decay adjustment or the square root of the number of days to expiration of your target options chain divided by 365 days.
Since I’m not a big fan of long-expiry condors, let’s look at the Nov. 15 options chain. Here, the average IV stands at 65% and the calendar days of expiration (as of Friday’s close) is 6 days. Multiply these two stats with the share price and you get $2.11. That means the market expects at most GEO stock to rise to $27.47 or dip to $23.25.
Using Barchart Premier to Find the Best Option
Even understanding our top and bottom breakeven prices, it’s a hassle to manually calculate viable short iron condors. That’s where Barchart Premier saves the day. By selecting the “Condor Strategies” on the left-hand side menu bar of GEO stock’s profile page, we can filter through all available condor trades. In my opinion, just the time savings alone is worth the price of membership.
Armed with our key metrics, you can see that the 22.00P | 24.00P || 28.00C | 30.00C condor is arguably the best option. With it, GEO stock can rise to $28.25 or drop to $23.75 before the trade becomes unprofitable. Overall, the absolute “width” of the condor is 17.01%; that’s 10.23% margin upward and 6.78% margin downward.
To be fair, the yield isn’t the most impressive at 14.29%, translating to putting $175 at risk to earn $25. However, it’s a very quick trade: GEO stock just needs to stay within the aforementioned 17.01% range by next Friday to be somewhat profitable. Further, if it lands somewhere between $24 and $28, you’d be able to collect the maximum 14.29% yield.
That said, you can choose to step away from this baseline trade and go higher risk with a 23.00P | 24.00P || 27.00C | 28.00C condor or a 22.00P | 23.00P || 26.00C | 27.00C condor. Doing so may get you a 17.65% yield or 25% yield, respectively. Better yet, you’ll put less money at risk but at the expense of narrowing your profitability range.
One of the main takeaways is that with Barchart Premier, you can extract this market intelligence almost instantaneously, allowing you to make the best decisions given the circumstances. Start a free trial and see for yourself how this groundbreaking platform can improve your results.
On the date of publication, Josh Enomoto 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.
