ConocoPhillips (COP)
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Remember, as is always the case, risk management is the key to long-term success when using high-probability option strategies. It’s the only way to truly allow the law of large numbers to work in your favor. Don’t get greedy and enamored by the quick nature of these trades. Stay disciplined!
ConocoPhillips (COP) is due to announce earnings Thursday before the opening bell.
The stock is currently trading for 115.50.
- IV Rank: 7.4
Expected Move for the August 11, 2023, Expiration Cycle: 112 to 119
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 119.
If we look at the call side of COP for the August 11, 2023, expiration, we can see that selling the 122 call strike offers an 86.23% probability of success. The 122 call strike sits just above the expected move, or 119.
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 109 put, with an 85.90% probability of success, works.
We can create a trade with a nice probability of success if COP stays within the 13-point range, or between the 122 call strike and the 109 put strike. Our probability of success on the trade is 86.23% on the upside and 85.90% on the downside.
Moreover, we have a 5.6% cushion to the upside and a 5.6% margin of error to the downside.
If we look below at the earnings reactions since 10/25/2006, 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 – 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 the trade:
Simultaneously:
Sell to open COP August 11, 2023, 122 calls
Buy to open COP August 11, 2023, 127 calls
Sell to open COP August 11, 2023, 109 puts
Buy to open COP August 11, 2023, 104 puts for roughly $0.60 or $60 per iron condor.
Our margin requirement would be roughly $440 per iron condor. Again, the goal of selling the COP iron condor is to have the underlying stock stay below the 122 call strike and above the 109 put strike immediately after COP earnings are announced.
Here are the parameters for this trade:
- The probability of success – 86.23% (call side) and 85.90% (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 – 108.40.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
