JPMorgan (JPM)
Okay, everyone, earnings season is finally upon us. I suspect we are in for an interesting earnings season, and to get us started, I will be holding a subscriber-only webinar tomorrow at 12 p.m. ET. Click here to sign-up. No worries if you can’t make it, we archive everything here at Cabot. You can find all the archived recordings here.
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!
JPMorgan (JPM) is due to announce earnings Friday before the opening bell.
The stock is currently trading for 148.75.
- IV Rank: 11.2
Expected Move for the July 21, 2023, Expiration Cycle: 144 to 153
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 144 to 153.
If we look at the call side of JPM for the July 21, 2023, expiration, we can see that selling the 157.5 call strike offers an 88.10% probability of success. The 157.5 call strike sits just above the expected move, or 153.
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 144. The 142 put, with an 84.72% probability of success, works.
We can create a trade with a nice probability of success if JPM stays within the 15.5-point range, or between the 157.5 call strike and the 142 put strike. Our probability of success on the trade is 88.10% on the upside and 84.72% on the downside.
Moreover, we have a 5.9% cushion to the upside and a 4.5% margin of error to the downside.
If we look below at the earnings reactions since 10/23/2006, we can see that there have been only a few breaches of 5% 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 JPM July 21, 2023, 157.5 calls
Buy to open JPM July 21, 2023, 162.5 calls
Sell to open JPM July 21, 2023, 142 puts
Buy to open JPM July 21, 2023, 137 puts for roughly $0.57 or $57 per iron condor.
Our margin requirement would be roughly $443 per iron condor. Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 157.5 call strike and above the 142 put strike immediately after JPM earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.10% (call side) and 84.72% (put side)
- The maximum return on the trade is the credit of $0.57, or $57 per iron condor
- Max return: 12.9% (based on $443 margin per iron condor)
- Break-even level: 158.07 – 141.43.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.