Disclaimer: The trades discussed in this blog reflect the author’s personal strategies and decisions. These are not financial advice and should not be considered recommendations to buy, sell, or hold any financial instruments. The author is not a licensed financial advisor. Options trading carries significant risk, and readers should perform their own research or consult a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results.
I was looking for iron condor’s opportunities and spotted a nice trade idea on Alcoa (AA). AA was trading at $41.88 at yesterday’s market close, and I opened the following iron condor:
- Bought a $33 put
- Sold a $34 put
- Sold a $44.5 call
- Bought a $46 call
This particular iron condor trade caught my eye due to several factors. Firstly, AA has been trading within a tight range over the past few weeks, as indicated by the contracting Bollinger Band width:
This common indicator used in options trading suggests that AA will likely continue to trade within this range for the next few days.
Moreover, AA recently released its earnings report, which showed mixed results. While the EPS was good, revenue came in lower than expected, and future expectations were not so great. This suggests that the market has already priced in AA’s future performance to some extent, further reinforcing the belief that it will continue trading within a tight range.
The expiration date for all options in this iron condor is November 1st. Why did I choose this specific date? I simply wanted to avoid any potential volatility or unpredictable market movements on Election Day (November 5th). As an options trader, it is crucial to consider external events and their potential impact on your trades.
Now, let’s take a closer look at the potential P&L of this iron condor (as found on our options screener):
As you can see, we are aiming for a maximum profit of $42.5, with AA remaining above $33.58 and below $44.92. If the stock moves close to these prices before expiration, I will consider closing the trade for a smaller profit. Notice that I am risking losing more than my maximum profit, which is something I only do for high-probability trades.
Furthermore, AA is a solid company, and I am comfortable holding onto this iron condor even if the stock does end up trading outside of our profit zone. The worst thing that can happen is that AA price moves up, but, without major news, I don’t expect it to cross the $46 mark in a short period. If it does, my loss would be manageable.
My expectation is that, with the US presidential campaign reaching its final stages and the market’s uncertainty about potential outcomes, we may see more price consolidation and AA trading within a tight range. There is no doubt that, once the election results are announced, we will see some volatility. But, for now, this iron condor on AA seems like a reasonable trade to consider.
For transparency, you can find all my trades in the public trade log.
Update: Trade Closed
The intuition was correct, and I thought it would be good to close this trade one day before the expiration. We’re already at a profit that’s very close to the maximum and, although tomorrow is unlikely to put our trade at a loss risk, this is just not worth it:
For the record, I closed the trade when AA’s price was $40.14, meaning that there was indeed not much of a movement since we opened the iron condor. From this trade, we learned that a squeeze in the Bollinger Bands can indeed signal that a stock has entered a low-volatility phase.
