https://cabotwealth.com/options-news/I mentioned in my weekly post, Top Options Plays for the Week, that Walgreens Boots Alliance (WBA) 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.
Today I’m going to focus on Walgreens Boots Alliance (WBA).
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The company is due to announce before the opening bell next Thursday, March 31. 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 WBA has performed immediately following earnings dating all the way back to March 21, 2007.
Image courtesy of Slope of Hope
As you can see, WBA 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 WBA’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 Walgreens Boots Alliance (WBA)
As I said, Walgreens Boots Alliance (WBA) is due to announce before the opening bell 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 47.02.
The next item is to look at WBA’s expected move for the expiration cycle that I’m interested in.
The expected move or expected range over the next eight days can be seen in the pale orange colored bar below. The expected move is from 44 to roughly 50, for a range of $6.
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 44 to 50.
This is my preference most of the time when using iron condors.
If we look at the call side of WBA below for the April 8, 2022, expiration, we can see that the 51 call strike offers an 88.03% probability of success. So, for this example, I’m going to sell the short call at the call strike and define my risk with the 55 call strike. By choosing the 55 call strike to define my risk, I know that there’s less than a 4% chance that WBA will push above 55 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 44. The 43 put strike, with an 82.07% probability of success, works as our short put strike. I’m going to stick with a 4-wide spread on the put side as well so the 39 put strike will define our probability of success on the downside. The 39 put strike has a 92.47% probability of success. This means there is a less than 8% chance of taking a max loss on the trade.
We can create a trade with a nice probability of success if WBA stays between our 8-point range, or between the 51 call strike and the 43 put strike. Our probability of success on the trade is 88.03% on the upside and 82.07% on the downside.
I like those odds. But do I like them enough to take the trade?
Here is the trade:
Sell to open WBA April 8, 2022, 51 calls
Buy to open WBA April 8, 2022, 55 calls
Sell to open WBA April 8, 2022, 43 puts
Buy to open WBA April 8, 2022, 39 for roughly $0.40 or $0.40 per iron condor
Our margin requirement is $360 per iron condor.
Return on the trade is 11.1%.
Again, the goal of selling the WBA iron condor is to have the underlying stock stay below the 51 call strike and above the 43 put strike immediately after WBA earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 88.03% (call side) and 82.07% (put side)
- The maximum return on the trade is the credit of $0.40, or $40 per iron condor; that’s an 11.1% return per iron condor
- Break-even level: 51.40 – 42.60
- The maximum loss on the trade is $360 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 at what our margin of error is on the upside and downside.
With WBA currently trading for roughly 47.02, our short 51 call strike is roughly 4 points away for an 8.5% margin of error.
On the downside, our short 43 put strike is also roughly 4 points away, for an 8.5% margin of error.
As for WBA’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 WBA, particularly with the recent market price action, is not for the faint of heart. But with a decent IV rank, decent premium and an opportunity for a high-probability trade with a nice margin of error, WBA 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 and closer to the announcement Thursday before the open. We don’t really have much room for error here, so anything less than $0.40 in premium and I will most likely move into another opportunity. And that’s OK. Opportunities will always present themselves.
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.