Visa (V)
Before I get to the trade, I will be holding a subscriber-only webinar this Friday 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!
Visa (V) is due to announce earnings Tuesday after the closing bell.
The stock is currently trading for 239.91.
- IV Rank: 14.9
Expected Move for the July 28, 2023, Expiration Cycle: 233 to 247
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 233 to 247.
If we look at the call side of V for the July 28, 2023, expiration, we can see that selling the 252.5 call strike offers a 90.08% probability of success. The 252.2 call strike sits just above the expected move, or 247.
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 233. The 227.5 put, with a 90.31% probability of success, works.
We can create a trade with a nice probability of success if V stays within the 25-point range, or between the 252.5 call strike and the 227.5 put strike. Our probability of success on the trade is 90.08% on the upside and 90.31% on the downside.
Moreover, we have a 5.2% cushion to the upside and a 5.2% margin of error to the downside.
If we look below at the earnings reactions since 2/4/2009, we can see that there have been only a few breaches of 6% 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 V July 28, 2023, 252.5 calls
Buy to open V July 28, 2023, 257.5 calls
Sell to open V July 28, 2023, 227.5 puts
Buy to open V July 28, 2023, 222.5 puts for roughly $0.50 or $50 per iron condor.
Our margin requirement would be roughly $450 per iron condor. Again, the goal of selling the V iron condor is to have the underlying stock stay below the 252.5 call strike and above the 227.5 put strike immediately after V earnings are announced.
Here are the parameters for this trade:
- The probability of success – 90.08% (call side) and 90.31% (put side)
- The maximum return on the trade is the credit of $0.50, or $50 per iron condor
- Max return: 11.1% (based on $450 margin per iron condor)
- Break-even level: 253 – 227.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
