I’ve been thoroughly enjoying our discussions on various earnings trades over the past six months. So today, I’m going to continue our discussion with a potential and interesting earnings trade that is outside the typical earnings season window.
Through the process of discussing the trade I’m going to focus on my strategy of choice, iron condors, and how I apply them around earnings announcements.
I hope that by going through numerous examples of options strategies during various market environments, we can start to build a solid foundation on how to appropriately apply options selling strategies with a focus on high-probability trades in any type of market environment.
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Iron Condor Earnings Trade in Costco (COST)
COST is due to announce after the close Thursday. So let’s take a look at a potential trade.
The stock is currently trading for 528.96.
The next item is to look at COST’s expected move for the expiration cycle that I’m interested in.
The expected move, or expected range, over the next seven days can be seen next to the pale orange colored bar below, under the “strike” column. The expected move is from 513 to roughly 545, for a range of $32.
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 513 to 545.
This is my preference most of the time when using iron condors. I want my iron condors to have a high probability of success.
If we look at the call side of COST for the December 10, 2021 expiration, we can see that the 560 call strike offers an 89.28% probability of success and the 555 call strike offers us an 86.14% probability of success. For this example, I’m going with the more conservative strike, which is the 560 strike.
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 513. The 505 put strike, with an 84.78% probability of success, works.
We can create a trade with a nice probability of success if COST stays between our 55-point range, or between the 560 call strike and the 505 put strike. Our probability of success on the trade is 89.28% on the upside and 84.78% on the downside.
I like those odds.
Here is the trade:
Simultaneously:
Sell to open COST December 10, 2021 560 calls
Buy to open COST December10, 2021 565 calls
Sell to open COST December 10, 2021 505 puts
Buy to open COST December 10, 2021 500 for roughly $0.70 or $70 per iron condor
Our margin requirement is $430 per iron condor.
Again, the goal of selling the COST iron condor is to have the underlying stock, in this case COST, stay below the 560 call strike and above the 505 put strike immediately after COST earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 89.28% (call side) and 84.78% (put side)
- The maximum return on the trade is the credit of $0.70, or $70 per iron condor
- Break-even level: 504.30 – 560.70
- The maximum loss on the trade is $4.30 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
Remember, 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 the week prior, so I have a good understanding 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.
As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.