A Potential Earnings Trade in CVS Health (CVS)

earnings-trade-CVS

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CVS Health (CVS) is due to announce before the open next Wednesday.

So, as always, let’s go through the exercise of looking at a potential trade and its associated mechanics to see if CVS is offering a decent trading opportunity this time around.

Here is an early look at a potential earnings trade for next week. Hopefully this helps a few of you, particularly those who are new to earnings trades, with the mechanics of a trade.

Iron Condor Earnings Trade in CVS Health (CVS)

Click here for a step-by-step approach to iron condors.

Again, CVS Health (CVS) is due to announce before the open next Wednesday. So, let’s use a risk-defined options strategy like an iron condor.

The stock is currently trading for 99.03.

CVS-stock-chart

The next item is to look at CVS’s expected move for the expiration cycle that I’m interested in.

The expected move or expected range over the next 14 days can be seen in the pale, orange-colored bar below. The expected move is from 93.5 to roughly 104.5, for a range of $11.

expected-move-CVS-earnings-trade

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 93.5 to 104.5.

This is my preference most of the time when using iron condors.

If we look at the call side of CVS for the May 13, 2022, expiration, we can see that the 108 call strike offers an 89.78% probability of success and the 109 strike offers us a 92.30% probability of success. For this example, I’m going to sell the short call at the 108 call strike and define my risk with the 113 call strike. By choosing the 113 call strike to define my risk, I know that there is less than a 5% chance that I will take a max loss on the trade.

bear-calls-CVS-earnings-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 93.5. The 90 put strike, with an 84.67% probability of success, works as our short put strike. The 90 put strike defines our probability of success on the downside. I’m going to define my risk by choosing the 85 put strike with a 92.74% probability of success. This means we have less than a 7.5% chance of taking a max loss on the downside.

bull-puts-CVS-earnings-trade

We can create a trade with a nice probability of success if CVS stays between our 18-point range, or between the 108 call strike and the 90 put strike. Our probability of success on the trade is 89.78% on the upside and 84.67% on the downside.

I like those odds.

Here is the trade:

Simultaneously:

Sell to open CVS May 13, 2022, 108 calls

Buy to open CVS May 13, 2022, 112 calls

Sell to open CVS May 13, 2022, 90 puts

Buy to open CVS May 13, 2022, 85 puts for roughly $0.53 or $53 per iron condor

CVS-iron-condor-price

Our potential return on the trade: 11.9%

Our margin requirement is $447 per iron condor.

Again, the goal of selling the CVS iron condor is to have the underlying stock stay below the 108 call strike and above the 90 put strike immediately after CVS earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 89.78% (call side) and 84.67% (put side)
  • The maximum return on the trade is the credit of $0.53, or $53 per iron condor
  • Breakeven level: 89.47 – 108.53
  • The maximum loss on the trade is $447 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.

One other important note: 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 to a few days 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.

8 comments on “A Potential Earnings Trade in CVS Health (CVS)

  1. Alfred Cheng on

    So the idea is to close the IC after the earning announcement, assuming there’s a drop of the IV? Does the large price drop(4/29, 9:13am) move this expected price range? I see that $90 is right around the one standard deviation, and the next lower strike is $85, nothing in between to choose from.

    Reply
    • Andy Crowder on

      Alfred,

      Yes, I typically get out as soon as earnings are announced and move on to the next opportunity. I simply want to take advantage of the IV crush. I hope this helps.

      Reply
  2. Marshall on

    Good Morning Andy. Do you always pick an expiration the week after earnings? Is there any type of defense for an iron condor if it is at or near exercise strike but there are no takers for the untested side? I have had a harder time trading wider condors because I have little interest to purchase my losing side of the trade. Your thoughts?

    Reply
    • Andy Crowder on

      Marshall,

      Not always. It just depends on when the company is due to report, i.e. early in the week/late in the week. With earnings, due to the liquidity in the stocks I choose, there is rarely, if ever, an issue. That’s why I keep my list limited, when others are out there trying to trade every announcement.

      Reply
  3. Scott on

    Greetings Andy,

    Thanks for all your informative article. I have been learning alot from you. Can you tell me how you determine the range of expected move? Would it be historical averages of past earnings? Much thanks.

    Reply
    • Andy Crowder on

      Scott,

      Thanks for the kind words. The expected move of a stock can be found by calculating 85% of the value of the front month at the money (ATM) straddle. Add the price of the front month ATM call and the price of the front month ATM put, then multiply this value by 85%. I allow my platforms to do the heavy lifting for me as they offer me calculations at every expiration, etc. I hope this helps.

      Reply
      • Henry L. on

        Hello Andy,

        You mention that your platform calculates the expected move for you. Can you recommend what platform to use to have this calculation available? Thank you for making your trading ideas available to everybody. Your explanations are very clear.

        Reply
        • Andy Crowder on

          Henry,

          I use Thinkorswim and Tastyworks for my trading platforms and have been using them for years, especially TOS which I have been using for roughly 20 years. Thanks for the kind words and I hope this helps.

          Reply

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