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Earnings Trader
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April 19, 2023

Cabot Options Institute Earnings Trader – Alert (AXP)

As discussed in our weekly issue last week, I will be taking a position in American Express (AXP) today.

American Express is due to announce before the opening bell Thursday.

Iron Condor Earnings Trade in American Express (AXP)

AXP is currently trading for 165.72. Let’s examine an iron condor trade with a high probability of success.

First, let’s take a look at the expected move in AXP for the expiration cycle that I’m interested in. Since AXP is due to report late in the week, I want to go out at least one additional week, in this case to the April 28 expiration cycle.

The expected move is from 160 to roughly 171, for a range of 11.

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 160 to 171.

This is my preference most of the time when using iron condors.

If we look at the call side of AXP for the April 28, 2023, expiration, we can see that the 175 call strike offers a 85.38% probability of success. So, I’m going to sell the short call at the 175 call strike and define my risk with the 180 call strike. By choosing the 180 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.

COI_ET_041923_AXP_bearcall.png

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 161. The 155 put strike, with an 87.34% probability of success, works. I’m going to define my risk by choosing the 150 put strike with a 93.85% probability of success. This means we have less than a 7% chance of taking a max loss on the downside.

COI_ET_041923_AXP_bullput.png

We can create a trade with a nice probability of success if AXP stays between our 20-point range, or between the 175 call strike and the 155 put strike. Our probability of success on the trade is 85.38% on the upside and 87.34% 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 AXP April 28, 2023, 175 calls

Buy to open AXP April 28, 2023, 180 calls

Sell to open AXP April 28, 2023, 155 puts

Buy to open AXP April 28, 2023, 150 puts for roughly $0.80 or $80 per iron condor (prices will fluctuate, please adjust accordingly if you wish to enter the trade)

Our potential return on the trade: 19.0%

Our margin requirement is $420 per iron condor.

Again, the goal of selling the AXP iron condor is to have the underlying stock stay below the 175 call strike and above the 155 put strike immediately after AXP earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 85.38% (call side) and 87.34% (put side)
  • The maximum return on the trade is the credit of $0.80, or $80 per iron condor
  • Breakeven level: 175.80 – 154.20
  • The maximum loss on the trade is $420 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines.

Historical Earnings Reactions (At the Open)

COI_ET_041923_AXP_earningsreactions.png

Historical Earnings Reactions (Intraday Price Action Immediately Following Announcement)

COI_ET_041923_earnreactionfullbar.png

With AXP trading for 165.72 we have a 5.6% cushion to the upside and a 6.5% cushion to the downside.

*Also, 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 via position size accordingly.


Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.