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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.
Let’s take a look at Barchart’s Short Iron Condor Screener for December 21st:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as NFLX, AAPL, MRNA, XOM, AMZN and TSLA. A lot of the results are short-term trades and may not be suitable for all traders.
Let’s adjust the scanner to make sure we are only looking for iron condor trades with between 15 and 60 days to expiry. We will also set a parameter for Expires Before Earnings = Yes.
This scan gives us the following results:
Let’s take a look at the first line item – an iron condor on Apple (AAPL).
Using the January 20 expiry, the trade would involve selling the 120 put and buying the 95 put. Then on the calls, selling the 145 call and buying the 170 call.
The price for the condor is $2.25 which means the trader would receive $225 into their account. The maximum risk is $2,275 for a total profit potential of 9.89% with a probability of 74.4%.
The profit zone ranges between 117.75 and 147.25. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $25 wide, the maximum risk in the trade is 25 – 2.25 x 100 = $2,275.
Therefore, if we take the premium ($225) divided by the maximum risk ($2275), we see that this iron condor trade has the potential to return 9.89%.
The Barchart Technical Opinion rating is a 100% Sell with a strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is in highly oversold territory. Beware of a trend reversal.
AAPL is showing an IV Percentile of 60% and an IV Rank of 50.87%. The current level of implied volatility is 33.93% compared to a 52-week high of 44.98% and a low of 22.49%.
The second Iron Condor on the list is a Microsoft (MSFT) Iron Condor for the January 20th expiration.
The MSFT condor has a slightly higher maximum profit in percentage terms at 10.25%. This example involves selling the 225 put and buying the 185 put, then selling the 265 call and buying the 305 call.
The maximum profit potential is $372 with maximum risk of $3,628. The total profit zone ranges between 221.28 and 268.72.
The Barchart Technical Opinion rating is a 56% Sell with a weakening short term outlook on maintaining the current direction.
MSFT is showing an IV Percentile of 32% and an IV Rank of 31.81%. The current level of implied volatility is 29.61% compared to a 52-week high of 47.09% and a low of 21.46%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the AAPL example can lose is $2,275 while the MSFT condor has risk of $3,628.
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.
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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.
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