Nvidia reports earnings on Wednesday after the closing bell. The iron condor is a common option trade used ahead of earnings when you expect the stock to stay within a range. Here's an example of how to set it up with NVDA stock.
NVDA Stock: What To Expect From Earnings
Nvidia stock has stayed within the expected range following five of the last six earnings announcements. For this earning report, the options market expects NVDA stock to stay in an 8% range up or down.
According to IBD Stock Checkup, NVDA stock ranks No. 9 in its group and has a Composite Rating of 84, an EPS Rating of 60 and a Relative Strength Rating of 91.
An iron condor is a neutral trade that relies on a stock staying within a range. Time decay and an expected decrease in implied volatility help make the trade successful.
Traders who think NVDA stock will not move too much following this earnings report can look at this trade setup as an iron condor trade.
Setting Up The Iron Condor
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread. You receive premium and rely on time decay to help you keep that premium as expiration approaches. At the same time, you don't want the stock to move too much in either direction.
First, we take the bull put spread. Using the Feb. 24 expiry, we sell the 200 put and buy the 195 put for NVDA stock. That spread sold on Friday for around 1.15.
Then comes the bear call spread. Using the same expiration of Feb. 24, we sell the 230 call and buy the 235 call. This spread traded around 90 cents on Friday.
In total, this iron condor for NVDA stock generates around 2.05 per contract, or $205 of premium.
Profits And Losses
The profit zone ranges between 197.95 and 232.05 for NVDA stock. This calculation takes the short strikes and adds or subtracts the premium received.
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As both spreads are $5 wide, the maximum risk in the trade is 5 – 2.05 x 100 = $295.
Therefore, if we take the premium ($205) divided by the maximum risk ($295), this iron condor trade for NVDA stock has a potential return of 69%.
Managing The NVDA Stock Option Trade
If NVDA stock stays within the expected range, this iron condor trade will work well. However, if NVDA stock makes a bigger-than-expected move, the trade will suffer losses. With a short expiration period, there won't be much room for adjustment after the earnings report. It's important to know that going in.
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.
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
