Home Depot (HD)
Like WMT, as discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Home Depot (HD) today. HD is due to announce earnings before the opening bell Tuesday (August 16). The stock is currently trading for 313.02.
IV Rank: 42.1
Expected Move for the August 19, 2022, Expiration Cycle: 300 to 327
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 300 to 327.
If we look at the call side of HD for the August 19, 2022, expiration, we can see that selling the 335 call strike offers a 90.95% probability of success. The 335 call strike sits just above the expected move, or 327. We can define our risk by buying the 340 call, thereby creating a five-strike-wide bear call spread at the 335/340 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 300. The 285 put, with a 90.46% probability of success, works. Staying with a five-strike-wide spread, I can buy the 280 put to define our risk and create a bull put spread at the 285/280 strikes.
We can create a trade with a nice probability of success if HD stays within the 50-point range, or between the 335 call strike and the 285 put strike. Our probability of success on the trade is 90.95% on the upside and 90.46% on the downside.
Moreover, we have a 7.0% cushion to the upside and an 8.9% margin of error to the downside …
Here is the trade:
Simultaneously:
Sell to open HD August 19, 2022, 335 calls
Buy to open HD August 19, 2022, 340 calls
Sell to open HD August 19, 2022, 285 puts
Buy to open HD August 19, 2022, 280 puts for roughly $0.63 or $63 per iron condor
Our margin requirement would be $437 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 335 call strike and above the 285 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
The probability of success – 90.95% (call side) and 90.46% (put side)The maximum return on the trade is the credit of $0.63, or $63 per iron condorMax return: 14.4%Breakeven level: 335.63 – 284.37