Cabot Options Institute Earnings Trader – Alert (HD)
Home Depot (HD)
As discussed on our weekly call today, I will be taking a position in Home Depot (HD). HD is due to announce earnings before the opening bell Tuesday (February 21). The stock is currently trading for 315.41. The reason I am placing the trade today is due to the market being closed on Monday, so this is the only time we can get in prior to the announcement. The earnings date is also the same for WMT, but as I explained on our call earlier today, I do not want to have two open earnings-based positions carry through the long weekend so I will not be trading WMT for this earnings cycle.
IV Rank: 31.7
Expected Move for the February 24, 2023, Expiration Cycle: 300 to 330
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 300 to 330.
If we look at the call side of HD for the February 24, 2023, expiration, we can see that selling the 340 call strike offers a 91.50% probability of success. The 340 call strike sits just above the expected move, or 330. We can define our risk by buying the 345 call, thereby creating a five-strike-wide bear call spread at the 340/345 call strikes.
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 300. The 290 put, with an 88.44% probability of success, works. Staying with a five-strike-wide spread, I can buy the 285 put to define our risk and create a bull put spread at the 290/285 strikes.
We can create a trade with a nice probability of success if HD stays within the 50-point range, or between the 340 call strike and the 290 put strike. Our probability of success on the trade is 91.50% on the upside and 88.44% on the downside.
Moreover, we have a 7.9% cushion to the upside and a 7.9% margin of error to the downside …
Courtesy of Slope of Hope
Here is the trade:
Sell to open HD February 24, 2023, 340 calls
Buy to open HD February 24, 2023, 345 calls
Sell to open HD February 24, 2023, 290 puts
Buy to open HD February 24, 2023, 285 puts for roughly $0.70 or $70 per iron condor
Our margin requirement would be $430 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 340 call strike and above the 290 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
The probability of success – 91.50% (call side) and 88.44% (put side)
The maximum return on the trade is the credit of $0.70, or $70 per iron condor
Max return: 16.3%
Breakeven level: 340.70 – 289.30
As always, if you have any questions, please feel free to email me at email@example.com.