As the semiconductor industry boosts the technology sectors, NXP Semiconductors, holds steady in the midst of volatile markets.
This gives us the opportunity to position a short iron condor that gives us upside and downside room that allows for the potential to deliver returns without full exposure to the market.
The IBD Stock Checkup shows the stock sitting with an IBD Composite Rating of 90.
The chart shows a steady hold over the last several weeks above both its 50-week simple moving average and its 200-week simple moving average. Options trading gives us the power to extract income out of the markets when directions are uncertain.
The trade — a short iron condor with $2.60 in premium credit — has a total spread between strikes at $5, granting us the capacity for a 1.4% return in one month.
The risk is $240 per iron condor and the maximum reward is $260, with the break-even prices at $172.40 and $197.60.
With the continued suspicion that the markets are going to be in a sideways grind — punishing speculation and creating flight to safety — we can gravitate to the sectors that are holding up the market right now. One of these is the semiconductor industry.
The weekly NXPI chart shows that the stock sits in a range of motion between 200 and 170. And even when it breaks these zones, the stock moves back into the congested range. This reveals the parameters for our the short iron condor trade, which performs well during the messy bits of market motion.
We will be rewarded for waiting at the edges of these regions amid price gyrations.
Strategy Works Well For Sideways Trend On Weekly Charts
This is how the trade is set up:
- Sell to open the NXPI April 21 monthly 195 calls, and buy to open the NXPI April 21 200 calls.
- Sell to open the NXPI April 21 monthly 175 puts, and buy to open the NXPI April 21 170 puts.
We are collecting $2.60 in premium, so the risk to holding the position into expiration is $2.40 plus the cost of execution. This is an excellent risk-to-reward event.
Start by identifying key chart levels.
Check out IBD's new OptionsTrader app for options education, trade ideas and more! Download from the Apple App Store today.
Congestion exists between 170 and 200 with a rising relative strength index, and the prices sitting above the key moving averages. That gives us the ideal setup for this type of trade.
Scenarios For NXPI Options Trade
What could happen:
- The stock moves within and potentially beyond the range but returns to rest above 175 and below 195 by expiration, yielding the full profit.
- The stock moves into our 50% profit line — when the position is worth around $1.30 — and we exit the trade.
- The stock rallies and moves over 197 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 172 with volume for more than three days. This means we must exit because the chart is in a breakdown.
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. Find her on Twitter and Stocktwits at @AnneMarieTrades
