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. Today, we're going to look at an example for Eli Lilly.
An iron condor can be set up via a combination of a bull put spread and a bear call spread.
The idea with the Eli Lilly stock 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 Jan. 19 expiry, we could sell the 510 put and buy the 500 put. That spread could be sold for around $1.35 late Wednesday.
Then the bear call spread could be placed by selling the 680 call and buying the 690 call. This spread could be sold for around $0.80.
In total, the iron condor will generate around $2.15 in premium per share.
The profit zone ranges between 507.85 and 682.15. This can calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $10 wide, the maximum risk in the trade is 10-2.15 x 100 = $785.
Eli Lilly Stock Trade Can Return 27%
Therefore, if we take the premium ($215) divided by the maximum risk ($785), this iron condor trade has the potential to return 27.4%.
If price action stabilizes, then iron condors will work well. However, if Eli Lilly 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 $215, so could set a stop loss at 1.5 times the premium, or around $325.
LLY stock is showing an IV percentile of 80%. That means the current level of implied volatility is higher than 80% of all readings in the last 12 months.
According to the IBD Stock Checkup, Eli Lilly stock is ranked No. 1 in its industry group and has a Composite Rating of 90, an EPS Rating of 66 and a Relative Strength Rating of 96.
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
