Potential Options Trades in Intuitive Surgical (ISRG): Short Iron Condor and a Bull Put Spread

In Wednesday’s edition of Mad Money on CNBC, Jim Cramer issued a bearish call in Intuitive Surgical (NASDAQ: ISRG), simply saying “don’t buy” the shares, after having missed the last 100 points in this “terrific stock.”  Over the past 50 weeks or so, ISRG shares have been on a tear, rallying from their April 10 low of 94 to their current perch above 355 – a gain of nearly 300%. For the past few sessions, the stock has been chugging along sideways – perhaps Cramer thinks its upward momentum is fading? ISRG closed at $356.18 on Wednesday and is down a fraction today.

While Cramer comments on the underlying stocks – whether or not to buy, sell, or hold – options traders have a number of strategies at their disposal, and these can be used for the short or long term, whether prices are expected to turn higher or head lower, or if volatility is projected to rise or fall.

Whether you think ISRG may continue to rally or opt to follow Cramer’s cautious outlook, there might be an options strategy that works well with your risk/reward profile. Below are just two examples of ways options investors could trade into ISRG. These are not buy-sell-hold recommendations – just a pair of potential strategies – one neutral, one bullish.

*Option prices given as of Thursday midday

Neutral Option Strategy: Short Iron Condor

Now, just because Cramer said “don’t buy” doesn’t mean he said “sell,” so let’s assume he is neutral on ISRG. In that case, stock traders can’t do much of anything. But options traders can sell an iron condor, a strategy that can benefit if the stock doesn’t move. An iron condor is a four-legged strategy that consists of a bull put spread and a bear call spread (both of which are credit spreads). The July 320/340 bull put spread can be sold for around $7.00 (by selling the July 340 put and buying the July 320 put). Simultaneously, the July 370/390 call spread can be sold for around $6.80 (by selling the July 370 call and buying the July 390 call). The net credit collected for the entire condor is $13.80 apiece.

The iron condor seller can collect the maximum profit (the entire credit of $13.80) if ISRG shares are trading between 340 and 370 when these options expire. Maximum loss is limited to $6.20, or the difference between the strike prices (of each spread) minus this credit– return on risk, therefore, is 222%. Because an iron condor is a two-sided trade, it has two breakeven prices – $326.20 to the downside and $383.80 to the upside. Below $326.20 or above $383.80, the condor begins to lose money, with the losses maxing out at 320 and 390.

Bullish Option Strategy: Bull Put Spread

Investors who disagree with Cramer and think the stock still looks bullish could consider a longer-dated bull put spread. The October 310/300 put spread can currently be sold for around $2.50, by selling the 310 put and buying the 300 put. This credit collected is equal to the maximum potential profit, and will be collected as long as ISRG is trading above 310 at October options expiration. The maximum loss, which occurs below the 300 level, is $7.50 per spread. This spread will be profitable at expiration on October 15^th as long as ISRG is trading above $307.50.

If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in an OptionsHouse virtual trading account.

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