Make This Income Trade as Chip Stocks Tumble

After a subdued response to AI chip giant NVDIA’s earnings on Wednesday night, it’s clear that traders are willing to keep stock prices in a range while the new administration’s changes continue to unfold in Washington D.C.

So, with memory chip-maker Micron’s earnings coming in the next few weeks, we can expect the same reaction.

A short iron condor trade is the way to take advantage and generate some income. 

Micron MU, which scores high on Benzinga Edge’s Growth and Quality rankings but has middling Momentum and Value, has been range bound since August, 2024. The range is tightening but the use of weekly contracts will increase time decay in our favor.

The stock’s resistance sits just above $105 but has rejected this line within days of touching. Support sits near $85 which has also been a favorable buying opportunity for traders with a bullish slant. 

The way we trade this is with a short iron condor.

Understanding the short iron condor 

A short iron condor consists of a short call spread and a short put spread combined to deliver higher income generation while the stock sits inside a channel. 

When we position with short iron condors, we attempt to collect time decay while a chart bases or settles into a new direction. As always, we assume that we don't know the direction but are able to estimate the magnitude of the move using the ATR (average true range, measured on the weekly chart) and the implied moves that the market makers have priced into the move over the months ahead. 

For this Micron setup, the short iron condor is:

• Sell to open 1 MU 28 Mar 105 calls 
• Buy to open 1 MU 28 Mar 115 calls 
• Sell to open 1 MU 28 Mar 85 puts 
• Buy to open 1 MU 28 Mar 75 puts 

At this writing the credit received is $3.90. This represents the maximum profit we will collect. With this kind of position, we collect a premium and as this premium erodes, we collect revenue from the position. 

Our maximum exposure is calculated the following way: the distance between the spread ($10) less the collected premium ($3.90) = $6.10.

Understanding the short iron condor spreads 

I often get asked why someone should take a trade where the risk is higher than the potential reward. The answer is this: the probability of the short iron condor with strikes far out of the money (meaning far away from the current price of the stock) returning gains is often as much as nine times more likely than the long iron condor.

In the current case, this is what we are looking at – the probability that the short iron condor delivering gains is more than five times as likely. So, we make the trade on the side of probabilities, rather than the possibility of outsized gains. 

The strategy result provides three choices to exit the trade: 

1. To buy back the short iron condor once it gets to an acceptable profit margin for you. I customarily look for 50% to 70% profit for these kinds of trades. 
2. To buy back the iron condor once it hits your loss threshold as determined by personal risk- this will happen with extreme movement. I customarily look at about 30% though depending on my size, I will choose 50%.
3. To hold the iron condor into expiration week before covering – this is a choice I would rarely recommend as prices can move quickly against you. And we have earnings scheduled for 3/20 and I would prefer to exit prior to the news if I take this kind of trade.

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