Cabot Options Institute Earnings Trader – Alert (JPM)
Before I get started, I wanted to let everyone know that we will hold our first subscriber-only webinar of the earnings season next Friday, April 21, at noon ET. Click here to sign up to attend.
Tomorrow marks the earnings releases of several big banks, most notably JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC).
As I discussed in our latest issue, I intend on placing a trade in JPM today. The big bank is due to report earnings prior to the opening bell Friday. Since beginning Earnings Trader just over two earnings cycles ago, we’ve managed to bring in one-day gains of 5.3%, 6.7% and 4.0% trading JPM.
JPMorgan Chase (JPM)
JPM is due to announce earnings Friday before the opening bell. The stock is currently trading for 128.38.
IV: 37.8%
Expected Move for the April 21, 2023, Expiration Cycle: 122 to 135
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 122 to 135.
If we look at the call side of JPM for the April 21, 2023, expiration, we can see that selling the 136 call strike offers an 88.15% probability of success. The 136 call strike sits just above the expected move, or 135.
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 122. The 120 put, with an 86.88% probability of success, works.
We can create a trade with a nice probability of success if JPM stays within the 16-point range, or between the 136 call strike and the 120 put strike. Our probability of success on the trade is 88.15% on the upside and 86.88% on the downside.
Moreover, we have a 5.8% cushion to the upside and a 6.6% margin of error to the downside.
If we look at the earnings reactions since 10/18/2006, we can see that there hasn’t been one breach of 5% to the upside or downside after an earnings announcement. As a result, an iron condor looks like a good, risk-defined strategy.
Here is the trade:
Simultaneously:
Sell to open JPM April 21, 2023, 136 calls
Buy to open JPM April 21, 2023, 141 calls
Sell to open JPM April 21, 2023, 120 puts
Buy to open JPM April 21, 2023, 115 puts for roughly $0.60 or $60 per iron condor.
Our margin requirement would be roughly $440 per iron condor. Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 136 call strike and above the 120 put strike immediately after JPM earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.15% (call side) and 86.88% (put side)
- The maximum return on the trade is the credit of $0.60, or $60 per iron condor
- Max return: 13.6% (based on $440 margin per iron condor)
- Breakeven level: 136.60 – 119.40.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.