Microsoft Iron Condor Could Net 25% In 3 Weeks
Microsoft (MSFT) is sitting right between the 50 and 200-day moving averages, and that could mean it’s a good time for 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.
MSFT IRON CONDOR
Traders that think MSFT stock might stay in the current range 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 October 20 expiry, we could sell the $295 put and buy the $290 put. That spread could be sold yesterday for around $0.50.
Then the bear call spread, which could be placed by selling the $340 call and buying the $345 call. This spread could also be sold yesterday for around $0.50.
In total, the iron condor will generate around $1.00 per contract or $100 of premium.
The profit zone ranges between $294 and $341. 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 – 1.00 x 100 = $400.
Therefore, if we take the premium ($100) divided by the maximum risk ($400), this iron condor trade has the potential to return 25%.
If price action stabilizes, then iron condors will work well. However, if MSFT stock makes a bigger than expected move, the trade will suffer losses.
The Barchart Technical Opinion rating is an 8% Buy with a weakest short term outlook on maintaining the current direction.
MSFT rates as a Strong Buy according to 29 analysts with 3 Moderate Buy ratings, 2 Hold ratings and 1 Strong Sell rating.
Microsoft Corporation is one of the largest broad-based technology providers in the world.
MSFT dominates the PC software market with more than 80% of the market share for operating systems.
The company's Microsoft 365 application suite is one of the most popular productivity software globally.
It is also now one of the two public cloud providers that can deliver a wide variety of infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions at scale.
Microsoft's products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools and video games.
The company designs and sells PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories.
Through Azure, it offers cloud-based solutions that provide customers with software, services, platforms and content.
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 $200, so we could set a stop loss equal to the premium received, or a loss of around $100.
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 $300 on the downside and $330 on the upside.
MSFT stock is currently showing an IV Percentile of 49% and is due to report earnings around October 24th.
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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On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.