Starbucks (SBUX)
As discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Starbucks (SBUX) today. SBUX is due to announce earnings after the closing bell today (August 2). The stock is currently trading for 84.65.
IV Rank: 70.12
Expected Move for the August 5, 2022, Expiration Cycle: 80 to 89
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 80 to 89.
If we look at the call side of SBUX for the August 5, 2022, expiration, we can see that selling the 92 call strike offers an 88.66% probability of success. The 92 call strike sits just above the expected move, or 89. We can define our risk through buying the 97 call, thereby creating a five-strike-wide bear call spread at the 92/97 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 80. The 77 put, with an 87.75% probability of success, works. Staying with a five-strike-wide spread I can buy the 72 put to define our risk and create a bull put spread at the 77/72 strikes.
We can create a trade with a nice probability of success if SBUX stays within the 15-point range, or between the 92 call strike and the 77 put strike. Our probability of success on the trade is 88.66% on the upside and 87.75% on the downside.
Moreover, we have an 8.89% cushion to the upside and 8.87% margin of error to the downside…
Here is the trade:
Simultaneously:
Sell to open SBUX August 5, 2022, 92 calls
Buy to open SBUX August 5, 2022, 97 calls
Sell to open SBUX August 5, 2022, 77 puts
Buy to open SBUX August 5, 2022, 72 puts for roughly $0.54 or $54 per iron condor
Our margin requirement would be $446 per iron condor. Again, the goal of selling the SBUX iron condor is to have the underlying stock stay below the 92 call strike and above the 77 put strike immediately after SBUX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.66% (call side) and 87.75% (put side)
- The maximum return on the trade is the credit of $0.54, or $54 per iron condor
- Max return: 12.1%
- Break-even level: 92.54 – 76.46