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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 March 18th:
As you can see, the scanner shows some interesting Iron Condor trades on stocks such as GOOGL, AMZN, TSLA, ORCL, COIN and NVDA.
Let’s look at the first line item – an iron condor on Alphabet.
Using the April 17th expiry, the trade would involve selling the $280 put and buying the $260 put. Then on the calls, selling the $340 call and buying the $360 call.
The price for the condor is $2.41 which means the trader would receive $241 into their account. The maximum risk is $1,759 for a total profit potential of 13.7% with a loss probability of 20.1%.
The profit zone ranges between $277.59 and $342.41. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The Barchart Technical Opinion rating is a 40% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Relative Strength just crossed above 50%. The market is indicating support for a bullish trend.
Alphabet is showing an IV Percentile of 16% and an IV Rank of 8.74%. The current level of implied volatility is 28.23% compared to a 52-week high of 57.46% and a low of 25.43%.
The next Iron Condor we will look at is on the second line using Amazon (AMZN) for the May 15h expiration.
This example involves selling the $180 put and buying the $170 put, then selling the $260 call and buying the $270 call.
The maximum profit potential is $149 with maximum risk of $851 and a loss probability of 20.1%. The total profit zone ranges between $178.51 and $261.49.
The Barchart Technical Opinion rating is a 72% Sell with a Weakening short term outlook on maintaining the current direction.
Relative Strength just crossed above 50%. The market is indicating support for a bullish trend.
Amazon is showing an IV Percentile of 39% and an IV Rank of 18.49%. The current level of implied volatility is 30.53% compared to a 52-week high of 63.91% and a low of 22.95%.
Mitigating Risk
Thankfully, iron condors are risk defined trades, so they have some build in risk management. The most the Alphabet example can lose is $1,759 while the Amazon condor has risk of $851.
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.
On the date of publication, Gavin McMaster had a position in: AMZN. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
