Microsoft (MSFT)
Microsoft (MSFT) is due to announce earnings today after the closing bell.
The stock is currently trading for 407.48.
- IV Rank: 58.5
- IV: 40.4%
Expected Move for the February 9, 2024, Expiration Cycle: 387 to 428
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 387 to 428.
If we look at the call side of MSFT for the February 9, 2024, expiration, we can see that selling the 445 call strike offers a 90.57% probability of success. The 445 call strike sits just above the expected move, or 428.
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 387. The 372.5 put, with a 91.09% probability of success, works.
We can create a trade with a nice probability of success if MSFT stays within the 72.5-point range, or between the 445 call strike and the 372.5 put strike. Our probability of success on the trade is 90.57% on the upside and 91.09% on the downside.
Moreover, we have a 9.2% cushion to the upside and an 8.6% margin of error to the downside.
If we look at the earnings reactions since 4/18/1996, we can see that there have been only a few breaches of 6% to the upside or downside after an earnings announcement. That being said, we have seen some decent moves, so, as always, make sure your position size is at reasonable levels.
Net Change – At the Opening Bell
Full Bar – Price Movement Throughout the Day
If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade.
Here is my trade:
Simultaneously:
Sell to open MSFT February 9, 2024, 445 calls
Buy to open MSFT February 9, 2024, 450 calls
Sell to open MSFT February 9, 2024, 372.5 puts
Buy to open MSFT February 9, 2024, 367.5 puts for roughly $0.65 or $65 per iron condor (adjust accordingly, prices may vary from time of alert).
Our margin requirement would be roughly $435 per iron condor. Again, the goal of selling the MSFT iron condor is to have the underlying stock stay below the 445 call strike and above the 372.5 put strike immediately after MSFT earnings are announced.
Here are the parameters for this trade:
- The probability of success – 90.57% (call side) and 91.09% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Max return: 14.9% (based on $435 margin per iron condor)
- Break-even level: 445.65 – 371.85.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.