This Options Iron Condor Might Etch Nice Gain By May – Investor's Business Daily
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Applied Materials (AMAT) boasts a strong return in 2024 so far, but last week’s dive indicates the chip equipment giant’s rally may be ready for a pause. So today we’re going to look at an example of an iron condor in options trading for AMAT stock.
Back on Nov. 10, AMAT stock cleared a 148.40 buy point in an eight-week-long double bottom. Since then, shares have rallied as much as 44%.
According to IBD Stock Checkup, AMAT stock ranks third in its group. It shows a Composite Rating of 95, an EPS Rating of 87 and a Relative Strength Rating of 92.
Iron condors can produce a return in stocks that stay within a specified range over the time period of a trade. This can be a welcome change for buy-and-hold investors who are reliant on markets always going up.
Traders can set up an iron condor in AMAT stock via a combination of a bull put spread and a bear call spread. The idea with the trade? 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 10 expiry, we could sell the put option in AMAT stock with a 175 strike price, then buy the 170 put. That spread could be sold for around $0.70, based on recent trading.
Then place the bear call spread. Sell the 210 call and simultaneously buy the 215 call. This spread could be sold for around $0.65.
In total the iron condor will generate around $1.35 in premium, based on recent trades.
The profit zone ranges between 173.65 and 211.35 in Applied Materials’ stock price. This can 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 in AMAT stock comes out to (5 – 1.35) x 100 = $365 per set of contracts.
Therefore, if we take the premium ($135) divided by the maximum risk ($365), this iron condor trade has the potential to return almost 37%.
If price action stabilizes, then iron condors will work well. However, if AMAT stock makes a big move the trade will suffer losses. One way to set a stop loss for an iron condor: Consider the premium received. In this case, we received $135. So we could set a stop loss at 1.5 times the premium or around $202.
AMAT stock is showing an IV (implied volatility) percentile of 98%. This means the current level of implied volatility is higher than 98% of all readings in the last twelve months.
The Santa Clara, Calif., firm is due to report earnings on May 16. So this trade should have no earnings risk, but keep in mind other industry peers may report their results before Applied Materials.
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
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