I mentioned in my weekly post, Top Options Plays for the Week, that JPMorgan Chase (JPM) offered a potential earnings trade next week.
As I’ve stated in the past, I hope that by going through a few examples of various options strategies 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.
The company is due to announce earnings before the opening bell on April 13. I’m going to go through a risk-defined strategy and an undefined risk strategy taking a high-probability approach. I hope this continues to be a helpful exercise for not only trading around earnings, but also for using similar strategies using various timeframes (expiration cycles).
Here is how JPM has performed immediately following earnings, dating all the way back to October 17, 2006.
Image courtesy of Slope of Hope
As you can see, JPM has a history of being volatile from time to time when its earnings are released. But that’s OK—it’s always good to see what a trade is offering us, particularly one that might seem a bit more aggressive given JPM’s history around earnings. But if the premium and probabilities make sense, well, we might have a nice opportunity at hand.
Let’s take a closer look.
Iron Condor Earnings Trade in JPMorgan Chase (JPM)
Again, JPM is due to announce before the opening bell Wednesday. So, let’s take a look at a potential trade using a risk-defined options strategy like an iron condor.
The stock is currently trading for 131.09.
The next item is to look at JPM’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 125 to roughly 137, for a range of $12.
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 125 to 137.
This is my preference most of the time when using iron condors.
If we look at the call side of JPM below for the April 14, 2022, expiration, we can see that the 140 call strike offers an 89.16% probability of success. So, for this example, I’m going to sell the short call at the 140 call strike and define my risk with the 145 call strike. By choosing the 145 call strike to define my risk, I know that there is a less than 4% chance that JPM will push above 145 prior to or at expiration.
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 range, or 125. The 123 put strike, with an 82.50% probability of success, works as our short put strike. I’m going to stick with a 5-wide spread on the put side as well so the 118 put strike will define our probability of success on the downside. The 118 put strike has a 91.61% probability of success. This means there is less than a 9% chance of taking a max loss on the trade.
We can create a trade with a nice probability of success if JPM stays between our 17-point range, or between the 140 call strike and the 123 put strike. Our probability of success on the trade is 89.16% on the upside and 82.50% on the downside.
I like those odds. But do I like them enough to take the trade?
Here is the trade:
Sell to open JPM April 14, 2022, 140 calls
Buy to open JPM April 14, 2022, 145 calls
Sell to open JPM April 14, 2022, 123 puts
Buy to open JPM April 14, 2022, 118 for roughly $0.69 or $0.69 per iron condor
Our margin requirement is $431 per iron condor.
Return on the trade is 16.0%.
Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 140 call strike and above the 123 put strike immediately after JPM earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 89.13% (call side) and 82.50% (put side)
- The maximum return on the trade is the credit of $0.69, or $69 per iron condor; that’s a 16.0% return per iron condor.
- Break-even level: 140.69 – 122.31
- The maximum loss on the trade is $431 per iron condor. We always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
But before I pull the trigger, let’s take a look what our margin of error is on the upside and downside.
With JPM currently trading for roughly 131.09, our short 140 call strike is roughly 9 points away for a 6.9% margin of error.
On the downside, our short 123 put strike is also roughly 8 points away, for a 6.1% margin of error.
As for JPM’s current IV rank?
Take a quick look at the chart above and you can clearly see we are experiencing some of the best premium in years.
Nonetheless, a trade in JPM, particularly with the recent market price action, is not for the faint of heart. But with a decent IV rank, OK premium and an opportunity for a high-probability trade with a nice margin of error, JPM will be tops on my watch list heading into next week. I will be interested to see how the premium holds up as we get closer to the announcement Wednesday before the open.
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 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.
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.