I have another potential “outside the earnings window” trade today. I will not be making the trade myself, but for those that would like an earnings trade idea on a highly-liquid underlying stock or simply want further education on how to trade around earnings, this post is right up your alley.
I hope that by going through numerous examples of options strategies during various market environments, we can start to build a solid foundation of 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 Nike (NKE).
NKE is due to announce after the close today. So let’s take a look at a potential trade.
The stock is currently trading for 156.24.
The next item is to look at NKE’s expected move for the expiration cycle that I’m interested in, which in this case is the December 23, 2021 expiration cycle.
The expected move, or expected range, over the next five days can be seen next to the pale orange colored bar below, under the “strike” column. The expected move is from 146 to roughly 167.5, for a range of $21.50.
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 146 to 167.50.
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 NKE for the December 23, 2021 expiration, we can see that the 172.5 call strike offers an 87.16% probability of success.
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 146. The 140 put strike, with an 85.89% probability of success, works.
We can create a trade with a nice probability of success if NKE stays between our 32.5-point range, or between the 140 call strike and the 172.5 put strike. Our probability of success on the trade is 87.16% on the upside and 85.89% on the downside.
I like those odds.
Here is the trade:
Simultaneously:
Sell to open NKE December 23, 2021 172.5 calls
Buy to open NKE December 23, 2021 177.5 calls
Sell to open NKE December 23, 2021 140 puts
Buy to open NKE December 23, 2021 135 puts for roughly $0.80, or $80 per iron condor
Our margin requirement is $420 per iron condor.
Again, the goal of selling the NKE iron condor is to have the underlying stock, in this case NKE, stay below the 172.5 call strike and above the 140 put strike immediately after NKE earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 87.16% (call side) and 85.89% (put side)
- The maximum return on the trade is the credit of $0.80, or $80 per iron condor for a 19.0% return
- Break-even level: 173.30 – 139.20
- The maximum loss on the trade is $420 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.