As discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Microsoft (MSFT) today.
Microsoft is due to announce after the closing bell today.
Iron Condor Earnings Trade in Microsoft (MSFT)
MSFT is currently trading for 250.48. Let’s examine an iron condor trade with a high probability of success.
First, let’s take a look at the expected move in MSFT for the expiration cycle that I’m interested in. Since MSFT is due to report early in the week, I want to go with the near-term expiration cycle.
The expected move or expected range over the next 3 days can be seen in the pale, orange-colored bar below. The expected move is from roughly 237.5 to 262.5, for a range of 25 points.
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 237.5 to 262.5.
This is my preference most of the time when using iron condors.
If we look at the call side of MSFT for the July 29, 2022, expiration, we can see that the 270 call strike offers an 89.93% probability of success. So, I’m going to sell the short call at the 270 call strike and define my risk with the 275 call strike. By choosing the 275 call strike to define my risk, I know that there is less than a 6% 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 237.5. The 227.5 put strike, with a 90.28% probability of success, works. I’m going to define my risk by choosing the 222.5 put strike with a 93.87% probability of success. This means we have less than a 7% chance of taking a max loss on the downside.
We can create a trade with a nice probability of success if MSFT stays between our 43.5-point range, or between the 270 call strike and the 227.5 put strike. Our probability of success on the trade is 89.93% on the upside and 90.28% on the downside.
Here is the trade:
Simultaneously:
Sell to open MSFT July 29, 2022, 270 calls
Buy to open MSFT July 29, 2022, 275 calls
Sell to open MSFT July 29, 2022, 227.5 puts
Buy to open MSFT July 29, 2022, 222.5 puts for roughly $0.65 or $65 per iron condor (prices will fluctuate, please adjust accordingly if you wish to enter the trade)
Our potential return on the trade: 14.9%
Our margin requirement is $435 per iron condor.
Again, the goal of selling the MSFT iron condor is to have the underlying stock stay below the 270 call strike and above the 227.5 put strike immediately after MSFT earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 89.93% (call side) and 90.28% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Breakeven level: 270.65 – 226.85
- The maximum loss on the trade is $435 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines when we can.
*Also 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 size accordingly.