This week offers a few opportunities to trade earnings.
Nike (NKE), Micron (MU) and Walgreens Boots Alliance (WBA) are the big three for the week. We’re still 2 to 3 weeks from earnings season, but there are always a few companies that like to announce outside of the typical earnings window. WBA is one of those companies. So, let’s take a look at a potential approach to trading the Dow stock.
Walgreens Boots Alliance (WBA) is due to announce before the opening bell Thursday.
Here is an early look at a potential earnings trade for this week. Hopefully this helps a few of you, particularly those who are new to earnings trades, with the mechanics of a trade.
Iron Condor Earnings Trade in Walgreens Boots Alliance (WBA)
WBA is currently trading for 41.74. Let’s take a look at an iron condor trade with a high probability of success.
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Let’s take a look at the expected move in WBA for the expiration cycle that I’m interested in. Since WBA is due to report late in the week, I want to go out at least one additional week, in this case the July 8 expiration cycle.
The expected move or expected range over the next 14 days can be seen in the pale, orange-colored bar below. The expected move is from 39.5 to roughly 44, for a range of 4.5.
Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 39.5 to 44.
This is my preference most of the time when using iron condors.
If we look at the call side of WBA for the July 8, 2022, expiration, we can see that the 45 call strike offers an 86.28% probability of success. So, I’m going to sell the short call at the 45 call strike and define my risk with the 49 call strike. By choosing the 49 call strike to define my risk, I know that there is less than a 3% chance that I will take a max loss on the trade.
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 39. The 38 put strike, with an 85.39% probability of success, works. I’m going to define my risk by choosing the 34 put strike with a 95.74% probability of success. This means we have less than a 5% chance of taking a max loss on the downside.
We can create a trade with a nice probability of success if WBA stays between our 7-point range, or between the 45 call strike and the 38 put strike. Our probability of success on the trade is 86.28% on the upside and 85.39% on the downside.
I like those odds. The question is, will the premium be enough to make the trade worth the risk? Let’s take a look.
Here is the trade:
Simultaneously:
Sell to open WBA July 8, 2022, 45 calls
Buy to open WBA July 8, 2022, 49 calls
Sell to open WBA July 8, 2022, 38 puts
Buy to open WBA July 8, 2022, 34 puts for roughly $0.35 or $35 per iron condor
Our potential return on the trade: 9.6%
Our margin requirement is $365 per iron condor.
Again, the goal of selling the WBA iron condor is to have the underlying stock stay below the 45 call strike and above the 38 put strike immediately after WBA earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 86.28% (call side) and 85.39% (put side)
- The maximum return on the trade is the credit of $0.35, or $35 per iron condor
- Breakeven level: 45.35 – 37.65
- The maximum loss on the trade is $365 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
One other important note: I prefer to make these trades the day before earnings are announced, so I would expect to see the premium a bit lower than it is now due to decay. So premium could be an issue at the time of the trade. But I like to see where potential trades stand a week to a few days prior, so I have a good understanding of what stocks look appealing for a potential trade around earnings, which is why I go through this exercise with the stocks on my weekly earnings watch list.
With the potential return on the trade being 9.6%, and knowing that premium will most likely decline as we move closer to WBA earnings, I would most likely pass on this one. My goal is to at least have the ability to bring in 15%, if not more, knowing that I will be taking the spread off in its entirety after earnings are announced. By doing so, I will be locking in at a smaller, but more consistent, return.