Disney (DIS)
As discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Disney (DIS) today. DIS is due to announce earnings after the closing bell today (August 10). The stock is currently trading for 110.60.
IV Rank: 55.16
Expected Move for the August 12, 2022, Expiration Cycle: 105 to 117
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 105 to 117.
If we look at the call side of DIS for the August 12, 2022, expiration, we can see that selling the 121 call strike offers an 87.87% probability of success. The 121 call strike sits just above the expected move, or 117. We can define our risk through buying the 126 call, thereby creating a five-strike-wide bear call spread at the 121/126 call strikes.
Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 105. The 101 put, with an 87.24% probability of success, works. Staying with a five-strike-wide spread, I can buy the 96 put to define our risk and create a bull put spread at the 101/96 strikes.
We can create a trade with a nice probability of success if DIS stays within the 20-point range, or between the 121 call strike and the 101 put strike. Our probability of success on the trade is 87.87% on the upside and 87.24% on the downside.
Moreover, we have an 9.4% cushion to the upside and 8.7% margin of error to the downside…
Here is the trade:
Simultaneously:
Sell to open DIS August 12, 2022, 121 calls
Buy to open DIS August 12, 2022, 126 calls
Sell to open DIS August 12, 2022, 101 puts
Buy to open DIS August 12, 2022, 96 puts for roughly $0.70 or $70 per iron condor
Our margin requirement would be $430 per iron condor. Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 121 call strike and above the 101 put strike immediately after DIS earnings are announced.
Here are the parameters for this trade:
The probability of success – 87.87% (call side) and 87.24% (put side)
The maximum return on the trade is the credit of $0.70, or $70 per iron condor
Max return: 16.3%
Breakeven level: 121.70 – 100.30