Cabot Options Institute Earnings Trader – Alert (MA)
Mastercard (MA)
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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!
Mastercard (MA) is due to announce earnings Thursday before the opening bell.
The stock is currently trading for 385.40.
- IV Rank: 51.7
Expected Move for the November 3, 2023, Expiration Cycle: 370 to 400
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 370 to 400.
If we look at the call side of MA for the November 3, 2023, expiration, we can see that selling the 407.5 call strike offers an 88.56% probability of success. The 407.5 call strike sits just above the expected move, or 400.
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 370. The 360 put, with an 88.56% probability of success, works.
We can create a trade with a nice probability of success if MA stays within the 47.5-point range, or between the 407.5 call strike and the 360 put strike. Our probability of success on the trade is 88.56% on the upside and 88.22% on the downside.
Moreover, we have a 5.7% cushion to the upside and a 6.6% margin of error to the downside.
If we look below at the earnings reactions since 11/1/2006, 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
Net Change – At the Closing Bell
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 MA November 3, 2023, 407.5 calls
Buy to open MA November 3, 2023, 412.5 calls
Sell to open MA November 3, 2023, 360 puts
Buy to open MA November 3, 2023, 355 puts for roughly $0.75 or $75 per iron condor.
Our margin requirement would be roughly $425 per iron condor. Again, the goal of selling the MA iron condor is to have the underlying stock stay below the 407.5 call strike and above the 360 put strike immediately after MA earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.56% (call side) and 88.22% (put side)
- The maximum return on the trade is the credit of $0.75, or $75 per iron condor
- Max return: 17.6% (based on $425 margin per iron condor)
- Break-even level: 408.25 – 359.25.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
