A short iron condor is an income strategy that aims to profit when a stock stays within a specified range over the course of the trade. The trade is composed of four options with the same expiration:
- A long put far out of the money
- A short put closer to the money
- A long call far out of the money
- A short call closer to the money
The maximum profit 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 rank.
With VIX on the rise, it could be a great time to look for Iron Condor opportunities.
Let’s take a look at Barchart’s Short Iron Condor Screener for July 18th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as TSLA, NVDA, TSM, AVGO and COIN.
Let’s look at the first line item – an iron condor on Tesla.
Using the July 26th expiry, the trade would involve selling the $185 put and buying the $160 put. Then on the calls, selling the $310 call and buying the $335 call.
The price for the condor is $0.69 which means the trader would receive $69 into their account. The maximum risk is $2,431 for a total profit potential of 2.84% with a probability of 94.6%.
The profit zone ranges between $184.31 and $310.69. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The Barchart Technical Opinion rating is a 56% Buy with an average short term outlook on maintaining the current direction.
TSLA is showing an IV Percentile of 95% and an IV Rank of 74.95%. The current level of implied volatility is 62.64% compared to a 52-week high of 72.03% and a low of 34.56%.
Tesla is due to report earnings on July 23rd, so this trade would have earnings risk if held to expiration.
The next Iron Condor we will look at is on the third line using Nvidia (NVDA), and for the August 16th expiration.
This example involves selling the $104 put and buying the $99 put, then selling the $129 call and buying the $134 call.
The maximum profit potential is $12 with maximum risk of $488 and a probability of 93.8%. The total profit zone ranges between $103.88 and $129.12.
The Barchart Technical Opinion rating is an 80% Buy with an average short term outlook on maintaining the current direction.
NVDA is showing an IV Percentile of 69% and an IV Rank of 58.39%. The current level of implied volatility is 53.16% compared to a 52-week high of 68.21% and a low of 32.04%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the TSLA example can lose is $2,431 while the NVDA condor has risk of $488.
For each trade consider setting a stop loss of 25-30% of the max loss.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s 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.
