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Trade of the Week – Iron Condor – WES

December 8, 2021

Trade of the Week – Iron Condor – WES

This week we have a silver quant tested iron condor trade idea on ASX:WES. Wesfarmers Limited (ASX: WES) is a Perth headquartered diversified conglomerate with holdings primarily across Australia and New Zealand.

This week we have a Silver-rated quant-tested iron condor trade idea on Wesfarmers Limited. Wesfarmers (ASX: WES) is a Perth headquartered diversified conglomerate with holdings primarily across Australia and New Zealand. WES is one of Australia’s largest employers with over 100,000 employees, and holds retail operations covering home improvement & office supplies, general merchandise & specialty departments stores, gas processing & distribution, chemicals & fertilisers, and industrial & safety products. The company has revenues of $33.94 billion, net profit of $2.38 billion, and a market cap of $67.05 billion.

Source: Implied Volatility

The platform rates this trade idea 79 points out of 100 which currently makes it a ‘Silver’ level trade. Traders use the iron condor strategy to generate income in sideways markets by selling the implied volatility that is priced into the options and allowing time decay to erode the value of the sold legs, making them cheaper to buy back later, or ideally, allowing them to expire worthless.

Here are some of the key facts that have contributed to this trade idea:

  • We are looking to enter the position close to 45 days to expiry (currently 43 DTE).
  • The 50 Day MA and 200 Day MA are close and favourable.
  • The stock is trading in the middle of recent peaks and troughs.
  • IV Rank is favourable (around 71)
  • Liquidity is good meaning tighter spreads and easier entry/exits.

Source: Implied Volatility

Source: Implied Volatility

WES’s implied volatility is sitting at 21.70% after a jump in the final days of November. This level of implied volatility is relatively high for this stock (as Wesfarmers is already diversified in it’s holdings). WES has an IV rank of 71.

Enter Iron Condor Strategy:

Source: Implied Volatility

Source: Implied Volatility

  • We will set the strike price for the sold Call Option at $61.88.
  • We will set the strike for the sold Put Option at $58.02.
  • Protection will be bought at a strike price of $64.78 on the upside and $55.11 on the downside.
  • We will set the expiry date to the 20th of January 2022 to capture 6 and a half weeks of time decay.
  • For entering this position, a premium of $2,014 will be received (max profit) and the maximum loss for the position will be $3,082.

The best outcome is for the position to expire worthless with the ASX:WES share price between the sold legs ($58.02 and $61.88). This will allow you to keep the upfront premium.

The worst outcome is for the position to expire with the share price at $64.78 and above, or $55.11 and below, delivering the maximum loss of $3,082.

The strategy breaks even at $56.87 and $63.03 on expiry.

You may choose to close out the position before expiry to lock in any gains resulting from time decay or a decline in implied volatility levels. Most time decay will occur in the final week before expiry, however markets may lose liquidity as we approach expiry and the likelihood of being assigned increases significantly.

WES has good market maker coverage, so the spreads should be relatively tight when entering and exiting a position before the final week. If the stock is trading around $58.02 and $61.88 between the 13th and 20th of January 2022, it may be worthwhile to lock in your gains by closing the position.

Note that ‘SPC’ is 103 and not the usual 100. This means rolling the position will not be possible as a TMC. Should you choose to roll part of this iron condor, you will need to close the January expiries first, then open up the new monthly expiries as a separate TMC.

 

For further information on using the Implied Volatility platform you can follow this link, here.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. From 5 October 2021, under Design and Distribution Obligations, anyone opening a trading account will be required to meet the Target Market Determination criteria of Phillip Capital and subject to an assessment the results of which will determine your eligibility for a trading account, for further information please see here.

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Any advice provided by *Reach including on its website and by its representatives is general advice only and does not consider your personal objectives, financial situation or needs, and you should consider whether it’s appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. Please click here https://reachmarkets.com.au/general-advice-warning/ to read our full general advice warning.


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

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