Amgen posted earnings that were better than expected last month. But additional comments about how well the company is competing in the Alzheimer's space pushed prices deep into support territory not seen since April 2024. Because Amgen stock has heavy institutional ownership, this allows us a unique opportunity to capture time value as the stock regains its footing.
Once again, we'll use a short iron condor that trades the wider ranges in Amgen. As traders move back in with some caution into ranges of resistance above, while holding supports below, we'll capture premium and benefit from time passing, assuming the range holds.
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When we position with short iron condors, we attempt to collect time decay while a chart bases or settles into a new direction. As always, we assume that we don't know the direction but are able to estimate the magnitude of the move using the ATR (average true range, measured on the weekly chart). We also lean on the implied moves that market makers price in over the months ahead.
According to IBD Stock Checkup, Amgen stock holds a 59 Composite Rating, a 73 Earnings Per Share Rating and a 22 Relative Strength Rating. Not the best ratings, but we aren't looking for a bullish move here. We're more interested in Amgen staying in a range.
Let's look at a trade structure we can use for this option trade on Amgen. A short iron condor consists of two spreads: a short call spread and a short put spread. Together they define a range of motion that we estimate the price action will not exceed.
- Buy to open one Amgen Feb. 21 call at a 305 strike.
- Sell to open one Amgen Feb. 21 call at a 300 strike.
- Sell to open one Amgen Feb. 21 put at a 250 strike.
- Buy to open one Amgen Feb. 21 put at a 245 strike.
At this writing the credit received is $2.30 per share. This represents the maximum profit we can collect on the trade. With this kind of position we collect a premium, and as this premium erodes we secure that revenue from the position.
Risk Calculation
Calculate maximum risk in the following way. Start with the distance between the strikes. Here both spreads are the same at 5.
Then you simply subtract the credit received from the distance of the strikes. In this case, the maximum loss is 2.70.
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The break-even prices for this trade are calculated in the following way: short call strike plus the premium we collected and short put strike minus the premium we collected. That is 300 + 2.30 = $302.30 and 250 - 2.30 = $247.70.
Stock-hunting using fundamental and price strength within The IBD Methodology is where I firmly plant myself under the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen in IBD.
Trade Management
Amgen fell to the bottom of a wide range near 250 this week and could extend below the break. But it's likely to return to the value area where much of the volume sits as support.
We see a fair amount of resistance at a round number near 300. Uncertainty into the next cycle of earnings may well keep us below this number in the short term. This range between 250 and 300 is where we set our short strikes and a close between those two areas at expiration gives us our maximum profit of the premium received.
The strategy provides three choices to exit the trade:
- Buy back the iron condor once it gets to an acceptable profit margin for you. I customarily look for 30%-60% profit for these kinds of trades in the current environment of volatility.
- Buy back the iron condor once it hits a loss threshold as determined by personal risk. This will happen with extreme movement. I customarily look at about 65%, although depending on my size I will choose 50%.
- Buy back the spreads into the week before expiration, if all is going well and you have decided to hold the trade closer to the end of expiration. I have had many trades go sideways, taking them down to the wire and not capturing gains, so I do not advise this.
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. You can find her on X at @AnneMarieTrades
