August 14, 2023

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:

Simultaneously:

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 andy@cabotwealth.com.

Andy Crowder

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. 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.