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Trade Idea: Let’s See What Disney Has to Offer this Earnings Season

disney-earnings-trade

“Milan, Italy - March 19, 2012: Disney Logo On Shop Window.”

RinoCdZ/Getty Images

I hope that by going through a few examples of various options strategies during every earnings season, we can start to build a solid foundation on how to appropriately apply options selling strategies with a focus on high-probability trades.

One of my favorite earnings plays occurs next week, Disney (DIS).

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While I’ve had great fortune trading around Disney’s earnings in the past, I also have a firm understanding that the stats will work themselves out and that losses will occur from time to time. And it’s why risk management, as seen through strict position-size guidelines, is imperative. Because while my win rate is high with Disney earnings, it’s not perfect. It’s understanding that if I place a trade at an 80% probability of success over and over and over, the law of large numbers while work itself out. But certainly not without sequence risk.

Here’s what I’m looking at going into next week. Let’s see what Disney has to offer this time around.

Iron Condor Earnings Trade in Disney (DIS)

Disney (DIS) is due to announce after the bell next Wednesday. So, let’s take a look at a potential trade.

The stock is currently trading for 140.03.

DIS-stock-chart

The next item is to look at Disney’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 in the pale orange colored bar below. The expected move is from 131 to roughly 149, for a range of $18.

disney-earnings-expected -move

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 131 to 149.

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 DIS for the February 11, 2022 expiration, we can see that the 152.5 call strike offers a 85.95% probability of success and the 155 strike offers us a 90.07% probability of success. For this example, I’m going with the more conservative strike, which is the 155 strike.

DIS-bear-call-spread-earnings

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 131. The 125, with an 86.00% probability of success, works.

screen-shot-2022-02-04-at-9-54-40-am-1024x247.png

We can create a trade with a nice probability of success if Disney stays between our 30-point range, or between the 125 call strike and the 155 put strike. Our probability of success on the trade is 90.07% on the upside and 86.00% on the downside.

I really like those odds.

Here is the trade:

Simultaneously:

Sell to open DIS February 11, 2022 155 calls

Buy to open DIS February 11, 2022 160 calls

Sell to open DIS February 11, 2022 125 puts

Buy to open DIS February 11, 2022 120 for roughly $0.65 or $65 per iron condor

Our margin requirement is $435 per iron condor.

Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 155 call strike and above the 125 put strike immediately after DIS earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 90.07% (call side) and 86.00% (put side)
  • The maximum return on the trade is the credit of $0.65, or $65 per iron condor, or 14.9% per iron condor
  • Break-even level: 155.65 – 124.35

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.