Implied volatility is shooting higher which could mean it’s a good time to be on look lookout for Iron Condor trades. 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, that are not due to report earnings until late January.

To do this, go to the Barchart Stock Screener and use the following filters:

• Most Recent Earnings Date – Between 10/25/2021 and 11/30/2021
• Market Cap – Greater than 100 billion
• IV Percentile – Greater than 50%
• Total Options Volume - Greater than 50,000

This screener gives the following results, sorted by implied volatility percentile:

We can see that Visa has both a high IV Percentile and IV Rank, so let’s use that in our Iron Condor Screener.

Here are the filters:

And these are the results:

Visa Iron Condors

Let’s take a look at the first line item.

Using the December 17 expiry, the trade would involve selling the 177.50 put and buying the 155 put. Then on the calls, selling the 200 call and buying the 222.50 call. The price for the condor is $3.40 which means the trade would receive $340 into their account. The maximum risk is $1,910 for a total profit potential of 17.80% with a probability of 88.2%. The profit zone ranges between 174.10 and 203.40. This can be calculated by taking the short strikes and adding or subtracting the premium received.

The second example also uses the December expiration and has a 22.17% profit potential with an 86.2% probability of success.

BABA Iron Condors

The second stock on our high implied volatility screener was Alibaba. Here are the iron condor screener results for BABA:

The first example uses the December 17 expiry. The trade involves selling the 115 put and buying the 100 put. Then on the calls, selling the 130 call and buying the 145 call. The price for the condor is $4.43 which means the trade would receive $443 into their account. The maximum risk is $1,057 for a total profit potential of 41.91% with a probability of 74.4%. The profit zone ranges between 110.57 and 134.43. This can be calculated by taking the short strikes and adding or subtracting the premium received.

The second example uses the January expiration and has a 99.47% profit potential with a 60.70% probability of success.

AMD Iron Condors

AMD is another stock with both a high IV Percentile and IV Rank from our initial screener. Let’s take a look at the iron condor screener results for AMD:

Again we have two examples. The first uses the December 21 expiry and involves selling the 140 put and buying the 120 put. Then on the calls, selling the 160 call and buying the 180 call. The price for the condor is $5.39 which means the trade would receive $539 into their account. The maximum risk is $1,461 for a total profit potential of 36.89% with a probability of 79.5%. The profit zone ranges between 134.61 and 165.39. 

The second example uses the January expiration and uses the same strikes as the first example. This iron condor has a 91.57% profit potential with a 65.80% probability of success.

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 Visa received $340 in premium, so a stop loss could be set if the trade is down $510. 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, Gavin McMaster did 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, Dec 1, 2021.