With most stocks seeing big downside moves and high volatility, we could be due for some consolidation. Iron condors are a strategy that does well when stocks stay relatively flat.
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.
Traders should have a neutral outlook on the stock and ideally look to enter when the stock has a high implied volatility percentile.
First, let’s look for stocks with a high implied volatility percentile.
We can see that Freeport McMoran (FCX), Uber Technologies (UBER), PayPal (PYPL), Netflix (NFLX), Alphabet (GOOGL) and Exxon Mobil (XOM) among others have both a high IV Percentile and IV Rank, so let’s use some of those stocks in our Iron Condor Screener.
Here are the filters:
And these are the results:
XOM Iron Condors
Let’s take a look at the first line item.
Using the July 29 expiry, the trade would involve selling the 82 put and buying the 75 put. Then on the calls, selling the 89 call and buying the 96 call.
The price for the condor is $2.55 which means the trader would receive $255 into their account. The maximum risk is $445 for a total profit potential of 57.30% with a probability of 54.3%.
The profit zone ranges between 79.45 and 91.55. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The list shows other trades with a higher profit potential, but lower probability of success.
PYPL Iron Condors
The third stock on our high implied volatility screener was PayPal.
Let’s look at the first PYPL line item from our screener results. Using the July 29 expiry. The trade involves selling the 67 put and buying the 62 put. Then on the calls, selling the 72 call and buying the 77 call.
The price for the condor is $2.73 which means the trader would receive $273 into their account. The maximum risk is $227 for a total profit potential of 120.26% with a probability of 43.3%.
The profit zone ranges between 64.27 and 74.73. This can be calculated by taking the short strikes and adding or subtracting the premium received.
NFLX Iron Condors
Netflix was another stock with both a high IV Percentile and IV Rank from our initial screener.
The first NFLX example from our screener also uses the July 29 expiry and involves selling the 170 put and buying the 155 put. Then on the calls, selling the 185 call and buying the 200 call.
The price for the condor is $9.40 which means the trader would receive $940 into their account. The maximum risk is $560 for a total profit potential of 167.86% with a probability of 36.6%.
The profit zone ranges between 160.60 and 194.40.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.
One way to set a stop loss for an iron condor is closing the trade if the loss is greater than 1.5 times the premium received. The first example on XOM received $255 in premium, so a stop loss could be set if the trade is down $375.
Iron condors can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and its 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.
*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in some of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, July 11, 2022.
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