Albemarle was Tuesday's IBD Stock Of The Day, as analysts expect the U.S.-based lithium giant to ride increased lithium prices to booming 2022 profits. The lithium stock is working on a possible handle to its cup base.
The most constructive price action would be a handle. So as we wait for it to form, there is money to be made before the next leg up. Without a handle, the buy point for the lithium stock is 334.65.
The International Energy Agency (IEA) has predicted annual lithium demand will increase to 2.5 million tons by 2030, up from around 500,000 tons today.
But after 30% gains since the last fade, this Charlotte, N.C.-based company's shares are likely to slow a bit. That sends me to my favorite revenue-generating tool, the short iron condor.
Strategy Works Well For Sideways Trend
This is how to set up the trade:
- Sell to open the Albemarle March 17 monthly 300 calls and buy to open the March 17 monthly 310 calls.
- Sell to open the March 17 monthly 240 puts and buy to open the March 17 monthly 230 puts.
At this writing, the premium for March's expiration was $4.40. The goal would be to allow this premium to erode to 50% of its value and then remove the exposure if price is at the top or bottom of the targeted range (230-310) with increasing volume.
Trade Exploration-Rationale For Lithium Stock Decision
Identify the key chart levels.
A gap sits near the 300 region, with buyers near 250. The price trend is upward, but the 50-day moving average is downward, suggesting sideways motion in the lithium stock.
My preference is always to sell premium in low-volatility readings, like when the VIX is below 35. Once the VIX moves above 35 to 40, we must reconsider risk there because the range of prices will expand.
The risk lies in a rise over 305 or a fade below 246 at the expiration date. If this happens, the obligation will be the difference between the $10 spread (the distance between the spread strikes) and how much premium we collected ($4.40), which is $5.60 per share.
Although this is the maximum risk, we will carefully watch the price movement to make sure that we do not expand into the maximum loss event.
Possible Scenarios For Lithium Stock Trade
What could happen:
· The stock moves within and potentially beyond the range but returns to rest above 240 and below 300 by expiration, yielding the full profit.
· The stock moves into our 50% profit line — when the position is worth around $2.20 — and I exit the trade.
· The stock rallies and moves over 300 with volume for more than three days. This means we must exit because the chart is in a breakout.
· The stock fades and moves below 240 with volume for more than three days. This means we must exit because the chart is in a breakdown.
The short iron condor is a common tool for time decay to create revenue stream. However, I rarely hold these into the expiration. Instead, I will look for 40%-50% of the position to erode and then exit. More often, this allows me to consistently manage my profit.
You can find Anne-Marie Baiynd on Twitter at @AnneMarieTrades
