Today, I’m going to issue my first alert, but it’s going to be a bit of a dress rehearsal. I’m going to follow the trade per usual with an opening and closing alert, but I want to go through the process the first time, step by step, so everyone has an understanding of what to expect going forward.
Moreover, with JPM being the first big bank to report, I would like to see how the market responds before taking on another earnings trade in a big bank stock.
If you wish to take the trade, just make sure you are using proper position size. Allow the law of large numbers to do the heavy lifting. Losses will no doubt occur from time to time so be prepared … and the best way to do that is through proper position size.
I will be sending out a closing alert (or at least an update on the trade) shortly after the opening bell tomorrow.
JP Morgan (JPM) is due to announce before the opening bell Thursday.
Iron Condor Earnings Trade in JP Morgan (JPM)
JPM is currently trading for 111.89. Let’s take a look at an iron condor trade with a high probability of success.
First, let’s take a look at the expected move in JPM for the expiration cycle that I’m interested in. Since JPM is due to report late in the week, I want to go out at least one additional week, in this case the July 22 expiration cycle.
The expected move or expected range over the next 9 days can be seen in the pale, orange-colored bar below. The expected move is from 106 to roughly 118, for a range of 12.
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 106 to 118.
This is my preference most of the time when using iron condors.
If we look at the call side of JPM for the July 22, 2022, expiration, we can see that the 120 call strike offers an 89.14% probability of success. So, I’m going to sell the short call at the 120 call strike and define my risk with the 123 call strike. By choosing the 123 call strike to define my risk, I know that there is less than a 5% chance that I will take a max loss on the trade.
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 106. The 103 put strike, with an 84.20% probability of success, works. I’m going to define my risk by choosing the 100 put strike with an 89.96% probability of success. This means we have less than a 11% chance of taking a max loss on the downside.
We can create a trade with a nice probability of success if JPM stays between our 17-point range, or between the 120 call strike and the 103 put strike. Our probability of success on the trade is 89.14% on the upside and 84.20% on the downside.
I like those odds. The question is, will the premium be enough to make the trade worth the risk? Let’s take a look.
Here is the trade:
Simultaneously:
Sell to open JPM July 22, 2022, 120 calls
Buy to open JPM July 22, 2022, 123 calls
Sell to open JPM July 22, 2022, 103 puts
Buy to open JPM July 22, 2022, 100 puts for roughly $0.50 or $50 per iron condor (prices will fluctuate, please adjust accordingly if you wish to enter trade)
Our potential return on the trade: 20.0%
Our margin requirement is $250 per iron condor.
Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 120 call strike and above the 103 put strike immediately after JPM earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 89.14% (call side) and 84.20% (put side)
- The maximum return on the trade is the credit of $0.50, or $50 per iron condor
- Breakeven level: 120.50 – 102.50
- The maximum loss on the trade is $250 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
Remember, proper position size is the KEY to long-term success when trading earnings. Keep your size within reason and allow the law of large numbers to do the work. Losses will occur, so manage your position, through position-size, accordingly.