How I'm Trading This Soaring Stock After Earnings

After a strong earnings response from Argan Inc. AGX, traders now look cautious about future upside, especially as earnings per share and growth expectations trim back. With high implied volatility and a likely consolidation period, this is the perfect time to sell options on the stock and turn that volatility into revenue.

The best trade in AGX’s situation is a short iron condor into July's expiration, as it’s a solid and low-risk way to collect revenue. 

A short iron condor is a limited-risk options trade in which we sell both a call spread and a put spread. Essentially, we’re collecting revenue from high options volatility while presenting a scenario where prices are bound within a range. 

The short iron condor requires margin that is calculated by noting the distance between the long strike and the short strike. In this case, that margin number is $1,000 for each iron condor sold:

• Sell to open 1 AGX 18Jul 240 calls 
• Buy to open 1 AGX 18Jul 250 calls 
• Sell to open 1 AGX 18Jul 160 puts 
• Buy to open 1 AGX 18Jul 150 puts 

I picked these strike prices because the relative resistance zone sits right around $220, while support sits near $170. 

The short iron condor above yields a credit of $4.87 at this writing, which will define the maximum gain if the prices stay between $240 and $160.

The breakeven prices of the stock at expiration on this trade are $234.87 on the upper bound and $145.13 on the lower bound. If prices hold between these ranges, we will leave the trade with a 100% profit at expiration. 

As for risk, the margin requirement is $1,000 (for each short iron condor) minus the credit collected ($487), which exposes us to $513 of risk if prices expand outside our breakeven calculations above. 

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I see three possible ways to leave the trade:

1. Buy the short iron condor back when it has accumulated a predefined profit for your trading style – we have 44 days of premium on our side with this kind of trade, so as long as both support and resistance hold, the trade premise remains valid. Consider leaving the trade with a minimum of 12 days to expiration. That said, as volatility affects option prices quite dramatically inside the time frame of 21 days, make sure you have price alerts set for the upper and lower short strikes. 
2. Set alerts for $240 and $150. If prices break these levels, allow 3-5 days for recovery else, exiting the trade is the most prudent. 
3. Buy the short iron condor back when it hits a predefined stop or risk limit for your trading style. You could choose a loss percentage, or you could also set additional alerts that are inside the boundaries – $220 and $170 – which will alert you to potential outside movement affecting your profit.

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