Iron condors can produce a return on stocks that stay within a specified range over the trade period.
This can be a welcome change for buy and hold investors who are reliant on markets always going up.
Today, we're going to look at an example on Marvell Technology.
An iron condor on Marvell stock can be set up via a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the May 17 expiry, we could sell the 62.50 put and buy the 57.50 put. That spread could be sold for around $0.55 late Friday.
Then the bear call spread could be placed by selling the 87.50 call and buying the 92.50 call. This spread could be sold for around $0.40.
In total the iron condor will generate around $0.95 in premium.
Profit Zone For Marvell Stock Trade
The profit zone ranges between 61.55 and 88.45. This can calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is 5-0.95 x 100 = $405.
Therefore, if we take the premium ($95) divided by the maximum risk ($405), this iron condor trade has the potential to return 23.5%.
If price action stabilizes then iron condors will work well. However, if MRVL stock makes a big move the trade will suffer losses.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $95, so could set a stop loss at 1.5 times the premium. That's around $150.
Higher Implied Volatility On Marvell Stock
Marvell stock is showing an IV percentile of 59%. That means the current level of implied volatility is higher than 59% of all readings in the last 12 months.
According to the IBD Stock Checkup, Marvell stock is ranked No. 9 in its industry group. It has a Composite Rating of 86, an EPS Rating of 70 and a Relative Strength Rating of 90.
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 X/Twitter at @OptiontradinIQ
