63% Yield in Just 2 Days!? Here’s a Look at Enphase Energy’s (ENPH) Iron Condor Play.

Barchart · 10/17 08:15

Solar energy specialist Enphase Energy (ENPH) is not having a good time in the markets right now. You can look at its recent performance in the charts, which is not at all encouraging. Or you can consider the 60-month beta of 1.72, which, while not the worst rating you’ll see, is still quite up there in terms of volatility. So, it’s no surprise that Barchart rates ENPH stock as a 100% Strong Sell.

It’s ugly and circumstances might worsen next week. On Oct. 22 after the ringing of the closing bell, Enphase is scheduled to disclose its latest earnings report. Given the poor sentiment in the market along with the terribly weak technical posture, ENPH stock could easily tumble. Sure, Wall Street rates shares as a consensus Moderate Buy. However, within that rating are three Sells (two of them “Strong”).

Thanks to Barchart Screeners, I was alerted to the potential trading idea as Enphase pinged as one of the derivatives with unusual options activity. Essentially, the smart money appears to take special interest in the solar technology giant. What’s more, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — was decisively pessimistic on Wednesday.

Nevertheless, it may be risky to pile on top of the obvious trajectory. In the trailing month, ENPH stock dropped more than 21% of equity value. In the past five sessions, it’s underwater by nearly 10%. There could be a modest rise higher before all heck breaks loose post-earnings.

Do you want to wager on this nuanced dynamic playing out? That’s what the iron condor is for.

ENPH Stock Offers a Daredevil Opportunity

Credit-based options strategies — transactions that involve an initial inflow of cash — are intriguing because they’re defensive in nature. Here, the idea isn’t so much about betting that a security moves to a certain threshold. Rather, you’re betting that the other side’s debit-based wager won’t pan out. If it doesn’t, you get to keep the income you initially received upfront.

However, credit spreads such as the bull put spread or bear call spread carry the risk of “excessive” exposure of funds. Of course, you can structure a spread how you please. Generally, though, a well-balanced options credit play will feature a potential risk load that is many multiples of the initial income received.

If you’re wondering if there’s another credit-based mechanism that allows for greater yield, there is. One particular idea we’ll explore below is the short iron condor. Effectively, this particular condor combines a bull put spread and a bear call spread. Logically, this also means that traders must be cognizant of two breakeven (BE) prices: an upper boundary and a lower boundary.

If in a “regular” spread the BE price represents the hard deck, in an iron condor, the BE prices represent the top and bottom of a tunnel (we’ll just assume an infinitely wide tunnel for sake of illustration). Imagine you’re flying an airplane in this environment: you can’t go too low but you also can’t go too high.

As you might assume, since you’re dealing with two hard decks, you receive more potential reward (all other things being equal). And in some cases, you don’t need to put as much money up front because you’re receiving double income. However, because of the narrowed range of profitability, you need to have confidence in the nuanced projection of the target stock.

With ENPH stock having already suffered a significant blow, there’s possibly some room to the upside (but not much). If you believe that the solar specialist can land somewhere in the middle of a defined price range, the short iron condor could be effective.

Don’t Hunt Condors Without Barchart Premier

I won’t leave you in suspense. There are two short iron condors that stood out to me for the options chain expiring Oct. 18 (this Friday):

  • 91.00P | 92.00P || 94.00C | 95.00C features a yield of 117.39%.
  • 90.00P | 92.00P || 96.00C | 98.00C features a yield of 62.6%.

If I had to choose one, I’d go with the second condor yielding nearly 63%. Although the first condor features almost double the yield, the margin of safety just isn’t as wide. At the current price of $93.13, ENPH stock is just 1.49% below the upper BE price and 1.83% above the lower BE. With the second condor, the BE thresholds are 3.76% below and 2.08% above, respectively.

Now, what may surprise investors is that Barchart identified 245 mathematically rational short iron condors for the Oct. 18 expiration date. So, how did I narrow the list down to two?

The options market is highly efficient but not perfectly so. Option spreads typically compound this inefficiency because you’re dealing with two strike prices. In a short iron condor, you’re dealing with four — leaving inefficiencies to potentially exacerbate. In the condor yielding nearly 63%, this is arguably the most favorably inefficient trade compared to its peers.

Of course, there’s zero guarantee that this trade will pan out. As mentioned earlier, the iron condor is risky. However, there is a science in choosing a specific condor and that’s where Barchart Premier comes into play.

It’s possible to come up with an interesting put or call spread on your own, given enough time. However, an iron condor with its four strike prices is simply too much work to conduct manually. If you have to fly into a tunnel, you want access to the best tools available. That’s where a Barchart Premier membership more than pays for itself, often within the first few trades.



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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.