Cabot Options Institute Earnings Trader – Alert (DIS)
As discussed in our weekly issue this week, and on our weekly call last Friday, I will be taking a position in Disney (DIS) today. DIS is due to announce earnings after the closing bell today (November 8). The stock is currently trading for 99.95.
IV Rank: 56.7
Expected Move for the November 11, 2022, Expiration Cycle: 92 to 108
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 92 to 108.
If we look at the call side of DIS for the November 11, 2022, expiration, we can see that selling the 113 call strike offers an 89.48% probability of success. The 113 call strike sits just above the expected move, or 108. We can define our risk by buying the 118 call, thereby creating a five-strike-wide bear call spread at the 113/118 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 92. The 89 put, with an 87.17% probability of success, works. Staying with a five-strike-wide spread, I can buy the 84 put to define our risk and create a bull put spread at the 89/84 strikes.
We can create a trade with a nice probability of success if DIS stays within the 24-point range, or between the 113 call strike and the 89 put strike. Our probability of success on the trade is 89.48% on the upside and 87.17% on the downside.
Moreover, we have an 13.1% cushion to the upside and 11.0% margin of error to the downside…
Courtesy of Slope of Hope
Here is the trade:
Sell to open DIS November 11, 2022, 113 calls
Buy to open DIS November 11, 2022, 118 calls
Sell to open DIS November 11, 2022, 89 puts
Buy to open DIS November 11, 2022, 84 puts for roughly $0.75 or $75 per iron condor
Our margin requirement would be $425 per iron condor. Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 113 call strike and above the 89 put strike immediately after DIS earnings are announced.
Here are the parameters for this trade:
The probability of success – 89.48% (call side) and 87.17% (put side)
The maximum return on the trade is the credit of $0.75, or $75 per iron condor
Max return: 17.6%
Breakeven level: 113.75 – 88.25