Home Depot (HD)
Home Depot (HD) is due to announce earnings Tuesday before the opening bell.
The stock is currently trading for 329.28.
- IV Rank: 31.4
Expected Move for the August 25, 2023, Expiration Cycle: 317.5 to 342.5
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 317.5 to 342.5.
If we look at the call side of HD for the August 25, 2023, expiration, we can see that selling the 352.5 call strike offers a 90.34% probability of success. The 352.5 call strike sits just above the expected move, or 342.5.
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 317.5. The 305 put, with an 89.54% probability of success, works.
We can create a trade with a nice probability of success if HD stays within the 47.5-point range, or between the 352.5 call strike and the 305 put strike. Our probability of success on the trade is 90.34% on the upside and 89.58% on the downside.
Moreover, we have a 7.1% cushion to the upside and a 7.4% margin of error to the downside.
If we look at the earnings reactions since 11/13/2006, we can see that there have been only a few breaches of 4% to the upside or downside after an earnings announcement.
Net Change – At the Opening Bell
Full Bar – Closing Bell
Here is the trade:
Sell to open HD August 25, 2023, 352.5 calls
Buy to open HD August 25, 2023, 357.5 calls
Sell to open HD August 25, 2023, 305 puts
Buy to open HD August 25, 2023, 300 puts for roughly $0.64 or $64 per iron condor.
Our margin requirement would be roughly $436 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 352.5 call strike and above the 305 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
- The probability of success – 90.34% (call side) and 89.58% (put side)
- The maximum return on the trade is the credit of $0.64, or $64 per iron condor
- Max return: 14.7% (based on $436 margin per iron condor)
- Breakeven level: 353.14 – 304.36.
As always, if you have any questions, please do not hesitate to email me at firstname.lastname@example.org.