Microsoft stock (NASDAQ:MSFT) finds itself perched between the 50 and 200-day moving averages, hinting at an opportune moment for an iron condor trade.
An iron condor strategy is devised to capitalize on a decrease in implied volatility while anticipating that the stock will remain within an anticipated range.
The wider the expected range becomes when implied volatility is elevated.
The iron condor’s maximum profit is confined to the premium collected, with a capped maximum potential loss. To compute the maximum loss, simply subtract the premium received from the difference between the strike prices of the long and short options.
Microsoft Stock’s Iron Condor Opportunity
For traders who believe that Microsoft stock will remain within its current range over the next few weeks, an iron condor could be a viable choice.
To recap, an iron condor is a blend of a bull put spread and a bear call spread.
The strategy’s core premise is to profit from the erosion of time value, all while expecting minimal movement in either direction.
Let’s start with the bull put spread. Utilizing the October 20 expiration, consider selling the $295 put and simultaneously purchasing the $290 put. As of yesterday, this spread could be sold for approximately $0.50.
Now, for the bear call spread, you can sell the $340 call and buy the $345 call. This particular spread could also be sold for around $0.50 yesterday.
In sum, the iron condor would generate approximately $1.00 per contract or $100 in premium.
The profit range stretches from $294 to $341. This calculation involves adding or subtracting the premium received to the short strike prices.
Since both spreads have a $5 width, the maximum risk in this trade is $5 – $1.00 x 100 = $400.
Hence, if we consider the premium ($100) divided by the maximum risk ($400), this iron condor trade carries the potential for a 25% return.
Keep in mind that iron condors thrive when price action stabilizes. However, if MSFT stock experiences a more substantial move than anticipated, the trade may incur losses.
Company Profile
Microsoft Corporation stands as one of the world’s largest and most diversified technology providers.
MSFT dominates the PC software market, boasting over 80% market share for operating systems.
The Microsoft 365 application suite ranks among the world’s most widely used productivity software.
Additionally, Microsoft is one of the two major public cloud providers capable of delivering a comprehensive range of infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) solutions on a large scale.
The company’s product lineup encompasses operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games.
Furthermore, Microsoft designs and markets PCs, tablets, gaming consoles, phones, and other intelligent devices, along with accompanying accessories.
Through Azure, Microsoft offers cloud-based solutions that furnish customers with software, services, platforms, and content.
Conclusion and Risk Management
Setting a stop loss for an iron condor based on the premium received is one approach. In this case, since we received $200, a stop loss equal to the premium received, or roughly $100, could be established.
Another method for managing the trade is to identify specific points on the price chart where adjustments or closures would be triggered. This could be approximately $300 on the downside and $330 on the upside.
Currently, MSFT stock displays an IV Percentile of 49% and is slated to report earnings around October 24th.
It’s crucial to remember that options carry inherent risks, and investors can potentially lose their entire investment. This article is intended solely for educational purposes and does not constitute a trade recommendation. Always perform your due diligence and consult with a financial advisor before making investment decisions.
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