Cryptocurrency related stocks have been moving strongly for weeks and Coinbase (COIN) along with them. With earnings on Coinbase stock coming after the close today, here’s an iron condor option trade that takes advantage of the higher implied volatility right now.
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Iron Condor For Coinbase Stock
Coinbase stock is showing elevated implied volatility with an IV Percentile reading of 96% and an IV Rank of 71. That means the current level of implied volatility is higher than most other readings in the past twelve months.
In part, that is because earnings are due to report after the close today. Traders that think COIN stock won’t move much following the earnings announcement, could look at an iron condor trade.
Iron condors are a strategy that are best placed when implied volatility is high as you are selling premium. When volatility is high, the iron condor can be placed further out-of-the-money giving the trade a higher chance at success.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread. Here’s how you could set it up with COIN stock.
First, we take the bull put spread. Using the Dec. 17 expiry, selling the 310 put and buying the 305 put traded at yesterday’s close around $1.55.
For the bear call spread, selling the 440 call and buying the 445 call was about $0.60 at the same expiration.
In total, the iron condor generated around $2.15 per contract or $215 of premium.
Managing The Trade
The profit zone ranges between 307.85 and 442.15 for the price of Coinbase stock. Calculate this by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 2.15 x 100 = $285.
Therefore, if we take the premium received ($215) divided by the maximum risk ($285), this iron condor trade has the potential to return 75.4%.
If price action stabilizes, iron condors tend to work well. However, if COIN stock continues to bounce around, the trade will suffer losses.
With earnings set for this afternoon, traders that don’t want exposure to that uncertainty, should sit this one out.
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
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Read More: Coinbase Stock Earnings On Tap; Is An Iron Condor The Way To Profit?