Nvidia is showing elevated implied volatility with an IV Percentile reading of 100%. That means the current level of implied volatility on Nvidia stock is higher than all other readings in the past twelve months.
In part, that is because Nvidia stock is due to report earnings after the close on Wednesday. Earnings events typically see elevated implied volatility just prior to the event.
An iron condor option trade can be used if you think the stock won't move too much following the earnings report.
Iron Condor On Nvidia Stock
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. As for the price, you don't want the stock to move much in either direction.
Let's look at how an iron condor might be put on for Nvidia stock. First, we take the bull put spread. Using the Feb. 18 expiry, we could sell the 220 put and buy the 215 put. That spread traded yesterday for around a $1.00 credit.
For the bear call spread, we could sell the 270 call and buy the 275 call with the same expiration of Feb. 18. This spread traded for around a 70 cent credit yesterday.
In total, the iron condor for Nvidia stock generated around $1.70 per contract or $170 of premium.
Profit And Loss Areas
Your maximum profit is the premium received. That's achieved between the short strikes of 220 and 270. The break-even points are a price of 218.30 and 271.70 for Nvidia stock. These are calculated by taking the short strikes and adding or subtracting the premium received. Outside of these levels at expiration, you have a loss.
For the maximum risk, you take the distance between strikes and subtract the premium received. As both spreads are $5 wide, the maximum risk in the trade is 5 — 1.70 x 100 = $330. The maximum loss occurs if you Nvidia stock finishes outside of the range of the long strikes at expiration. So below 215 or above 275.
The return on risk is 51.5%. Simply take the premium ($170) divided by the maximum risk ($330).
Managing The Trade
If price action stabilizes in Nvidia stock, the iron condor will work well. However, if NVDA stock makes a bigger than expected move on earnings and the rest of this week, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they are a bit hit or miss. Nvidia stock stayed within the expected range following four out of the last five earnings releases. Although as we know, past performance doesn't guarantee future results.
Nvidia stock is ranked No. 4 in its group and has a Composite Rating of 94, an EPS Rating of 97 and a Relative Strength Rating of 95.
Another iron condor that appeared in this column was on Walt Disney. The iron condor on Disney stock expired last week for a full profit.
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
