First Solar stock currently trades right in between its 50-day moving average at 153 and its 200-day moving average at 173. With implied volatility elevated, this could make for a great iron condor setup.
Iron condors can produce a return on stocks that stay within a specified range over the trade period. This can be a welcome change for buy-and-hold investors who rely on markets always going up.
Let's look at how we might set up an iron condor on First Solar stock. Back on June 5, we looked at an iron condor on Alphabet, which is working very well so far.
Traders can set up an iron condor via a combination of a bull put spread and a bear call spread.
How To Make The Iron Condor Get Wings
First, we take the bull put spread. Using an Aug. 15 expiration date, we could sell the 135 put and buy the 125 put. Investors could sell that spread for around 1.05 per share this morning.
Then the bear call spread could be placed by selling the 210 call and buying the 220 call. This spread could be sold for around 1.20 per share this morning.
In total the iron condor generates around $225 in premium. The profit zone ranges between 132.75 and 212.25. This can be calculated by taking the short strikes and adding or subtracting the premium received.
This is quite a wide range for a stock like First Solar. As both spreads are 10 wide, the maximum risk in the trade is $10 minus $2.25 times 100 shares in the contract. The total is $775.
Therefore, if we take the premium of $225 divided by the maximum risk of $775, this iron condor trade has the potential to return 29% in just over one month. If price action stabilizes then iron condors will work well. However, if First Solar stock makes a big move 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 $225, so we could set a stop equal to the premium of $225.
First Solar Stock: Earnings Risk Possible
Note that First Solar is due to report earnings in late-July, so this trade would have earnings risk if held to expiration.
According to Investor's Business Daily's IBD Stock Checkup, First Solar ranks fourth in its group. It also has a Composite Rating of 33, an Earnings Per Share Rating of 28 and a Relative Strength Rating of 31.
In previously noted options trades, this diagonal spread on Nvidia has done well and can potentially be closed early for a nice profit. Also, this bull put spread on Celestica should be closed early as it has achieved very close to the full profit.
Please remember that options are risky. Further, 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
