This week offers quite a few trading opportunities.
Earnings are in full swing and quite a few large-cap stocks are due to announce.
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My focus next week will be on a few of the bigger, lower-beta names like JP Morgan Chase (JPM), Citigroup (C), Morgan Stanley (MS), Wells Fargo (WFC) and a few others. Boring, low-beta stocks are always my preference. Remember, this isn’t a strategy that attempts to hit home runs. Singles and doubles are the goal, coupled with strict risk-management guidelines, mostly seen through proper position size. The high-beta stocks of the world typically don’t make the cut, even though the premium can be appealing. Again, the Law of Large Numbers determines our fate. So, stay consistent and allow the statistics to work in your favor.
Here is an early look at a potential earnings trade for this week. Hopefully this helps a few of you with the mechanics of the trade.
Iron Condor Earnings Trade in Morgan Stanley (MS)
Morgan Stanley (MS) is due to announce before the open Thursday. 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 85.00.
The next item is to look at Morgan Stanley’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 80 to roughly 90, for a range of $10.
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 80 to 90.
This is my preference most of the time when using iron condors.
If we look at the call side of MS for the April 22, 2022, expiration, we can see that the 93 call strike offers an 89.87% probability of success and the 94 strike offers us a 92.09% probability of success. For this example, I’m going to sell the short call at the 93 call strike and define my risk with the 98 call strike. By choosing the 98 call strike to define my risk, I know that there is less than a 4% chance that I will take a max loss on the trade.
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 80. The 77 put strike, with an 87.47% probability of success, works as our short put strike. The 73 put strike defines our probability of success on the downside. I’m going to define my risk by choosing the 73 put strike with a 94.31% probability of success. This means we have less than a 6% chance of taking a max loss on the downside.
We can create a trade with a nice probability of success if Morgan Stanley stays between our 16-point range, or between the 93 call strike and the 77 put strike. Our probability of success on the trade is 89.87% on the upside and 87.47% on the downside.
I like those odds.
Here is the trade:
Sell to open MS April 22, 2022, 93 calls
Buy to open MS April 22, 2022, 98 calls
Sell to open MS April 22, 2022, 77 puts
Buy to open MS April 22, 2022, 73 for roughly $0.43 or $43 per iron condor
Our potential return on the trade: 9.4%
Our margin requirement is $457 per iron condor.
Again, the goal of selling the MS iron condor is to have the underlying stock, in this case MS, stay below the 93 call strike and above the 77 put strike immediately after MS earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 89.87% (call side) and 87.47% (put side)
- The maximum return on the trade is the credit of $0.43, or $43 per iron condor
- Break-even level: 93.43 – 76.57
- The maximum loss on the trade is $457 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 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.
Again, if you have any questions, please feel free to email me or post your question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.