Cabot Options Institute Earnings Trader – Alert (XOM)
Exxon Mobil (XOM)
Exxon Mobil (XOM) is due to announce earnings Friday before the opening bell.
The stock is currently trading for 115.80.
- IV Rank: 7.9
- IV: 33.2%
Expected Move for the May 5, 2023, Expiration Cycle: 112 to 120
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 112 to 120.
If we look at the call side of XOM for the May 5, 2023, expiration, we can see that selling the 122 call strike offers an 88.54% probability of success. The 122 call strike sits just above the expected move, or 120.
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 112. The 110 put, with an 83.43% probability of success, works.
We can create a trade with a nice probability of success if XOM stays within the 12-point range, or between the 122 call strike and the 110 put strike. Again, our probability of success on the trade is 88.54% on the upside and 83.43% on the downside.
Moreover, we have a 5.4% cushion to the upside and a 5.0% margin of error to the downside.
If we look at the earnings reactions since 2/1/2007, we can see that there have been only a few breaches of 4% to the upside and none to the downside after an earnings announcement. That being said, 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 XOM May 5, 2023, 122 calls
Buy to open XOM May 5, 2023, 127 calls
Sell to open XOM May 5, 2023, 110 puts
Buy to open XOM May 5, 2023, 105 puts for roughly $0.60 or $60 per iron condor (adjust accordingly, prices may vary from time of alert).
Our margin requirement would be roughly $440 per iron condor. Again, the goal of selling the XOM iron condor is to have the underlying stock stay below the 122 call strike and above the 110 put strike immediately after XOM earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.54% (call side) and 83.43% (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)
- Break-even level: 122.60 – 109.40.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.