Cabot Options Institute Earnings Trader – Alert (MSFT)
Microsoft (MSFT)
Microsoft (MSFT) is due to announce earnings Tuesday after the closing bell.
The stock is currently trading for 277.60.
- IV Rank: 29.2
- IV: 40.31%
Expected Move for the May 5, 2023, Expiration Cycle: 262 to 292
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 262 to 292.
If we look at the call side of MSFT for the May 5, 2023, expiration, we can see that selling the 300 call strike offers a 90.56% probability of success. The 300 call strike sits just above the expected move, or 292.
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 262. The 252.5 put, with an 89.30% probability of success, works.
We can create a trade with a nice probability of success if MSFT stays within the 47.5-point range, or between the 300 call strike and the 252.5 put strike. Our probability of success on the trade is 90.56% on the upside and 89.30% on the downside.
Moreover, we have an 8.1% cushion to the upside and a 9.0% margin of error to the downside.
If we look at the earnings reactions since 1/25/2007, we can see that there have been only a few breaches of 6% to the upside or downside after an earnings announcement. That being said, we have seen some decent moves, so, as always, make sure your position size is at reasonable levels.
Net Change – At the Opening Bell
Full Bar – Price Movement Throughout the Day
If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade.
Here is my trade:
Simultaneously:
Sell to open MSFT May 5, 2023, 300 calls
Buy to open MSFT May 5, 2023, 305 calls
Sell to open MSFT May 5, 2023, 252.5 puts
Buy to open MSFT May 5, 2023, 247.5 puts for roughly $0.70 or $70 per iron condor (adjust accordingly, prices may vary from time of alert).
Our margin requirement would be roughly $430 per iron condor. Again, the goal of selling the MSFT iron condor is to have the underlying stock stay below the 300 call strike and above the 252.5 put strike immediately after MSFT earnings are announced.
Here are the parameters for this trade:
- The probability of success – 90.56% (call side) and 89.30% (put side)
- The maximum return on the trade is the credit of $0.70, or $70 per iron condor
- Max return: 16.3% (based on $430 margin per iron condor)
- Break-even level: 300.70 – 251.80.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.