Zoom Video Technologies (ZM) is showing elevated implied volatility (IV) with an IV Percentile reading of 76%. That means that the current level of implied volatility in Zoom stock is higher than 76% of all other readings in the past 12 months.
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In part, that is because the company is due to report earnings after the close Monday, and we typically see elevated implied volatility around that event.
Traders that think Zoom stock will not move too much following the news could look at an iron condor trade.
Let’s look at an example using ZM. 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.
Zoom Stock: How To Construct The Bull Put Spread
First, we take the bull put spread. Using the Dec. 3 expiry, we could sell the 220 put and buy the 215 put. That spread could be sold on Friday for around $0.85. Then the bear call spread, which could be placed by selling the 295 call and buying the 300 call. This spread could be sold on Friday for around $0.55.
In total, the iron condor will generate around $1.40 per contract or $140 of premium.
The profit zone ranges between 218.60 and 296.40. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.40 x 100 = $360.
Therefore, if we take the premium ($140) divided by the maximum risk ($360), this trade in Zoom stock has the potential to return 38.9%.
How Zoom Acts On Earnings
If price action in Zoom stock stabilizes, then iron condors will work well. However, if ZM 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. Zoom stock has stayed within the expected range following four out of the last five earnings releases. Although as we know, past performance doesn’t guarantee future performance.
Zoom is currently showing a Composite Rating of 71, an EPS Rating of 99 and a Relative Strength Rating of 7.
After the Q2 earnings release, ZM stock dropped 16%, so that is also something to consider.
Please remember that options are risky, and investors can lose 100% of their investment.
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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