With most stocks seeing big downside moves and high volatility, we could be due for some consolidation. Iron condors are a strategy that does well when stocks stay relatively flat.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Traders should have a neutral outlook on the stock and ideally look to enter when the stock has a high implied volatility percentile.
First, let’s look for stocks with a high implied volatility percentile. For this example, we will exclude any stocks with earnings within the next 20 days. Here is the screener setup.
And here are the results:
We can see that Boston Scientific Group (BSX), Oracle (ORCL), Gilead Sciences (GILD), Kenvue (KVUE), Adobe Systems (ADBE), General Mills (GIS) and Fedex (FDX) have a high IV Percentile, so let’s use some of those stocks in our Iron Condor Screener.
Here are the filters:
And these are the results:
ORCL Iron Condors
Let’s take a look at the first line item.
Using the September 29 expiry, the trade would involve selling the $115 put and buying the $100 put. Then on the calls, selling the $130 call and buying the $145 call.
The price for the condor is $4.32 which means the trader would receive $432 into their account. The maximum risk is $1,068 for a total profit potential of 40.45% with a probability of 56.3%.
The profit zone ranges between $110.68 and $134.32. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The list shows other trades with a higher profit potential, but lower probability of success.
FDX Iron Condors
Another stock on our high implied volatility screener was Fedex.
Let’s look at the first FDX line item from our screener results. Using the September 22 expiry. The trade involves selling the $255 put and buying the $235 put. Then on the calls, selling the $275 call and buying the $295 call.
The price for the condor is $7.67 which means the trader would receive $767 into their account. The maximum risk is $1,233 for a total profit potential of 62.21% with a probability of 51.4%.
The profit zone ranges between $247.33 and $282.67.
ADBE Iron Condors
Adobe was another stock with both a high IV Percentile and IV Rank from our initial screener.
The first ADBE example from our screener also uses the September 8th expiry and involves selling the $520 put and buying the $495 put. Then on the calls, selling the $545 call and buying the $570 call.
The price for the condor is $11.68 which means the trader would receive $1,168 into their account. The maximum risk is $1,332 for a total profit potential of 87.69% with a probability of 46.4%.
The profit zone ranges between $508.32 and $556.68.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.
One way to set a stop loss for an iron condor is closing the trade if the loss is greater than 1.5 times the premium received. The first example on ORCL received $432 in premium, so a stop loss could be set if the trade is down $648.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and its getting close to expiry.
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.
On the date of publication, Gavin McMaster 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.
