Banking

This Iron Condor Has A Potential Return Of 22% In A Month

The iron condor is an option strategy best placed when implied volatility is high. Nucor stock qualifies in that regard as it’s near its highest implied volatility over the last 12 months. Here’s how to profit.




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Taking Advantage Of High Implied Volatility

Nucor (NUE) currently stands with an Implied Volatility Percentile reading of 93%. That means that the current level of implied volatility is higher than 93% of all other readings in the past twelve months.

As a reminder, the 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.

When volatility is high, the iron condor can be placed further out-of-the-money. That gives traders a higher chance at success.

Here’s how it would work for Nucor stock.

Iron Condor For Nucor Stock

First, we take the bull put spread. Using the October 15 expiry, we could sell the 95 put and buy the 90 put. With Nucor stock trading around 109 yesterday, that spread traded around $0.50.

For the bear call spread, selling the 125 call and buying the 130 call on NUE stock traded around a $0.40 credit yesterday.

In total, the iron condor generated around $0.90 per contract, or $90 of premium.

The profit zone ranges between 94.10 and 125.90. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads on Nucor stock are $5 wide, the maximum risk takes the difference of the strikes less the premium received or $410.

With a the max profit of $90 divided by the maximum risk $410, this iron condor on Nucor stock has a potential to return 22% in roughly a month.

Managing The Trade

If price action stabilizes, iron condors work well. However, if NUE stock continues to bounce around, the trade will suffer losses.

One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $90. We could set a stop loss at 1.5 times the premium or a loss of around $135.

Another way to manage the trade is to set a point on the Nucor stock chart where the trade will be adjusted or closed. That could be around 102 on the downside and 118 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.

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 Twitter at @OptiontradinIQ.

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