Trade Idea: Two Options Strategies for Disney’s Upcoming Earnings Announcement
I’ve been thoroughly enjoying our discussions on various earnings trades this earnings season. As promised last week, I’m going to discuss iron condors and how I apply them around earnings announcements.
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.
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Iron Condor Earnings Trade in Disney (DIS)
Disney (DIS) is due to announce next week. So, let’s take a look at a potential trade.
The stock is currently trading for 176.09.
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 168 to roughly 183, for a range of $15.
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 168 to 183.
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 November 12, 2021 expiration, we can see that the 182.5 call strike offers a 72.93% probability of success and the 185 strike offers us a 78.97% probability of success. For this example, I’m going with the more conservative strike, which is the 185 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 168. The 167.5, with a 78.33% probability of success, works.
We can create a trade with a nice probability of success if Disney stays between our 17.5-point range, or between the 185 call strike and the 167.5 put strike. Our probability of success on the trade is 78.97% on the upside and 78.33% on the downside.
I like those odds.
Here is the trade:
Simultaneously:
Sell to open DIS November 12, 2021 185 calls
Buy to open DIS November 12, 2021 187.5 calls
Sell to open DIS November 12, 2021 167.5 puts
Buy to open DIS November 12, 2021 165 for roughly $0.75 or $75 per iron condor
Our margin requirement is $175 per iron condor.
Again, the goal of selling the DIS iron condor is to have the underlying stock, in this case DIS, stay below the 185 call strike and above the 167.5 put strike immediately after DIS earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 78.97% (call side) and 78.33% (put side)
- The maximum return on the trade is the credit of $0.75, or $75 per iron condor
- Break-even level: 185.75 – 166.75
- The maximum loss on the trade is, in theory, unlimited. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
A Quick Comparison Between a Disney Iron Condor Earnings Announcement Trade and a Short Strangle Earnings Announcement Trade
As I stated last week, I would prefer to see a bit higher probability of success on the trade, but that is one of the downsides of iron condors versus, say, a short strangle. When using a risk-defined trade like an iron condor, as we increase our probability of success our potential premium declines.
For example, if we were using a short strangle, we could sell the 190 call strike and the 162.5 strike and bring in more premium than our iron condor. The difference is an iron condor approach requires less capital and is risk-defined, therefore the percentage return is greater on the iron condor. But, the premium (in total) and the probabilities are significantly higher when using a short strangle.
A short strangle does not have defined risk but offers a much higher probability of success. In this case, the probability of success if using a short strangle with the 190 call and 162.5 put strikes would be roughly 87.42% on the upside to 88.72% on the downside.
Out total premium would be $1.41, almost double that of the iron condor. And again, the probability on the short strangle is significantly higher.
That’s a big difference, and one of the reasons professionals tend to side with short strangles over iron condors. But, remember, there is a time and place for iron condors. And if you want to define your risk, there really isn’t a better strategy around earnings.
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.