Nvidia (NVDA) is showing elevated implied volatility, with an I.V. Percentile reading of 98%.
That means that the current level of implied volatility in Nvidia stock is higher than almost all other readings in the past 12 months.
In part, that is because the company is due to report earnings next week, and we typically see elevated implied volatility around that event.
Traders who think Nvidia stock will not move too much following the earnings report, could look at an iron condor trade.
An Example Using Nvidia Stock
Let’s look at an example using NVDA 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 while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the Nov. 19 expiry, we could sell the 270 put and buy the 265 put. That spread could be sold Wednesday for around $1.
For the bear call spread, it could be placed by selling the 340 call and buying the 345 call. This spread could be sold Wednesday for around $0.30.
In total, the iron condor will generate around $1.30 per contract, or $130 of premium.
The profit zone ranges between 268.70 and 341.30. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Maximum Risk On Nvidia Trade Is $370
Because both spreads are $5 wide, the maximum risk in the trade is 5 — 1.30 x 100 = $370.
Therefore, if we take the premium ($130) divided by the maximum risk ($370), this iron condor trade has the potential to return 35%.
If price action stabilizes, then iron condors will work well. However, if Nvidia stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. Nvidia has stayed within the expected range following four out of the last five earnings releases. But as we know, past performance doesn’t guarantee future performance.
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
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