Amazon Iron Condor Could Net 35% In 3 Weeks

Amazon (AMZN) sitting right between the 50 and 200-day moving averages. The stock is also showing high volatility with an IV Percentile of 75% and an IV Rank of 64%.

The Barchart Technical Opinion rating is a56% Sell with a Weakening short term outlook on maintaining the current direction. 

AMZN rates as a Strong Buy according to 31 analysts with 5 Moderate Buy ratings, 1 Hold rating and 1 Strong Sell rating.

Amazon.com is one of the largest e-commerce providers, with sprawling operations spreading across the globe. Its online retail business revolves around the Prime program well-supported by the company's massive distribution network. Further, the Whole Foods Market acquisition helped Amazon establish footprint in physical grocery supermarket space. Amazon also enjoys dominant position in the cloud-computing market, particularly in the Infrastructure as a Service space, thanks to Amazon Web Services, which is one of its high-margin generating businesses. Amazon has also become a household name with its Alexa powered Echo devices. Artificial Intelligence backed Alexa is helping the company sell products and services. The company reports revenue under three broad heads'North America, International and AWS, respectively. Amazon targets three categories of customers - consumers, sellers and website developers.

Today, we’re going to look at an iron condor trade. 

An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for an iron condor 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.

AMZN IRON CONDOR

AMZN is sitting right between the 50 and 200-day moving averages. Traders that think the stock might stay at this level over the next few weeks could look at an iron condor.

As a reminder, an iron condor is 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 February 17 expiry, we could sell the 85 put and buy the 80 put. That spread could be sold yesterday for around $0.70.

Then the bear call spread, which could be placed by selling the 110 call and buying the 115 call. This spread could be sold yesterday for around $0.60.

In total, the iron condor will generate around $1.30 per contract or $130 of premium.

The profit zone ranges between 83.70 and 111.30. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.30 x 100 = $370.

Therefore, if we take the premium ($130) divided by the maximum risk ($370), this iron condor trade has the potential to return 35%.

If price action stabilizes, then iron condors will work well. However, if AMZN stock makes a bigger than expected move, the trade will suffer losses.

Note that Amazon is due to report earnings on February 2nd and the options market is pricing in a potential move of 9.1% in either direction.

Conclusion And Risk Management

One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $130, so we could set a stop loss equal to the premium received, or a loss of around $130.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 85 on the downside and 105 on the upside.

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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