Fabless chipmaker Marvell Technology stock is currently showing high implied volatility with an IV percentile of 75%. 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 are reliant on markets always going up.
Let's look at how we might set up an iron condor on Marvell stock. Back on July 2, we looked at an iron condor on First Solar, which is working well so far.
An iron condor can be set up via a combination of a bull put spread and a bear call spread.
Taking The Bull, Placing The Bear
First, we take the bull put spread. Using an Aug. 15 expiration, we could sell the 69 put and buy the 67 put. That spread could be sold for around 24 cents a share.
Then the bear call spread, which could be placed by selling the 85 call and buying the 87 call. This spread could be sold for around 18 cents a share. In total, the iron condor will generate around $42 in premium in a contract with 100 shares.
The profit zone ranges between 68.58 and 85.42. This can calculated by taking the short strikes and adding or subtracting the premium received. Those levels are above recent support levels and also below resistance levels.
As both spreads are $2 wide, the maximum risk in the trade is $2 minus 42 cents, multiplied by 100. That comes out to $158. Therefore, if we take the $42 premium divided by the maximum risk of $158, this iron condor trade has the potential to return 27% in just over one week.
If price action remains stable then this iron condor will work well. However, if Marvell 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 $42, so we could set a stop equal to the premium of $42.
No Earnings Risk On Marvell Stock
Marvell is due to report earnings in late-August, so this trade should have no earnings risk.
According to IBD Stock Checkup, Marvell stock ranks No. 10 in its group. Further, Investor's Business Daily gives it a Composite Rating of 94 out of a best-possible 99, an Earnings Per Share Rating of 96 and a Relative Strength Rating of 58.
Meanwhile, this cash-secured put trade on Robinhood Markets briefly was in the money but eventually expired worthless. Also, this trade on Nvidia is looking good so far.
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, 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.
