Riot Platforms Options Offer a Volatility Play

By Josh Enomoto (@EnomotoMedia)

Given the dynamism of the market, it’s not always easy to enter a directional wager. Instead, the only concept you have any confidence in is the kinesis of your target security. If you anticipate either big movement or a slowing pace, you can ignore the bull/bear argument and choose to play the volatility game.

Under normal frameworks, such an approach might seem foolish: bulls make money when their investment rises while bears ink positive returns when their target asset sinks. However, with options trading, everyday investors can open a treasure trove of compelling profit pathways. Today, let’s explore the beauty and modularity of the iron condor.

What’s a Condor and Why You Should Care

One of the advanced multi-leg options strategies, the iron condor is the combination of two vertical spreads. In a long iron condor, a trader effectively combines a bull call spread and a bear put spread. The idea here is for the target security to either rise above or below predefined profitability zones. Thus, you’re anticipating an increase in implied volatility (IV).

On the other end of the scale, the short iron condor combines a bull put spread and a bear call spread. In this trade, the anticipation is for the target security to trade inside predetermined upper and lower profitability boundaries. Therefore, traders who sell short iron condors believe that IV will either stabilize or decline.

Fundamentally, the iron condor solves the problem associated with directionally confusing assets. Consider the case of blockchain mining specialist Riot Platforms (NASDAQ:RIOT). Given the company’s obvious ties to cryptocurrencies, namely red-hot bitcoin, its shares are likely to move. However, it’s not always clear if that move will be to the upside or down.

With an iron condor, you can place wagers on how volatile RIOT stock will be rather than its ultimate destination by a specific expiration date.

Running Some Quick Condor Math

Depending on the options chain (expiration date), there could be hundreds of individual iron condors to choose from. I’ll let you in on a little secret: most of them will not be worth your time because they’re either too risky (and thus unlikely to be successful) or too likely to be successful and will then impose an opportunity cost.

To balance risk and reward, it’s important to understand what the market projects will be the high/low price range of the target security. We can extract this information through a stochastic analysis. Simply multiply three metrics: share price, IV and the time decay adjustment.

For the options chain expiring Dec. 13 and based on RIOT stock closing at $12.65 on Nov. 29, multiply the following:

• Share price of $12.65

• IV of 118.73% (1.1873)

• Time decay adjustment or square root of 13 days divided by 365 days.

The product of the formula comes out to $2.83, giving us a maximum upside target of $15.48 and a downside target of $9.82. However, I also want to account for market “realism.” Therefore, it may be prudent to take 5% off the max target, which comes out to $14.71. I’ll then take the nominal difference of $2.06 and subtract from the share price, giving me a downside target of $10.59.

Baselining the Condors

Now that we know where RIOT stock may end up, we can look for a long iron condor that best fits the $14.71/$10.59 range. The one condor that stood out was the 11.00P | 11.50P || 14.00C | 14.50C. 

Here, you would put $39 at risk for the chance to earn $11, giving a payout of 28.21%. Barchart.com notes that the probability of profit for this transaction clocks in at 56.4%.

Still, before pulling the trigger on this trade, it’s best to compare it with the short iron condor. One trade to look at is the 11.50P | 11.00P || 14.50C | 14.00C. 

This setup carries a maximum risk of $161 per contract, with a maximum potential profit of $39. The payout ratio comes to 24.22%, slightly lower than the long iron condor. However, the short condor offers a probability of profit at 60.8%.

Fundamentally, the cryptocurrency market — while known for wild price swings — appears to have entered a relative period of sideways consolidation. It wouldn’t be out of the question for RIOT stock to trade within a defined range. Because the market is giving me such a wide breadth of mobility for the short iron condor (with the up/down breakeven prices at $14.39 and $11.11, respectively), I’m tempted to consider it over the long version.

Strategy for the Directionally Confused

The iron condor stands as a powerful strategy for traders looking to navigate uncertain market conditions. At its core, the strategy leverages the predictability of volatility—whether increasing or stabilizing—to generate profits through a balanced, multi-leg options approach.

The long iron condor, with its focus on sharp price movements, caters to traders anticipating heightened implied volatility. On the other hand, the short iron condor is tailored for range-bound scenarios, where stability in the underlying asset provides opportunities to capitalize on premium decay.

What makes the iron condor so appealing is its versatility. Unlike directional trades, it allows investors to step back from the binary bull-or-bear debate and instead focus on the dynamics of movement (or the lack thereof). This modularity makes the iron condor a go-to strategy for markets or assets where directional certainty is elusive but volatility trends can be reasonably anticipated.

Ultimately, success with iron condors lies in aligning the strategy with your market outlook and confidence in the underlying assumptions. Whether long or short, the iron condor provides a thoughtful, calculated way to turn uncertainty into opportunity.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Josh Enomoto is currently rated #94 out of 30,228 financial bloggers on TipRanks. Covering the hottest topics on Wall Street from initial public offerings to cryptocurrencies, you can also find Josh's work on InvestorPlace, Benzinga, and Emerging Growth. He has appeared as a frequent guest expert on CGTN America as well.