Trade Idea: My Iron Condor Approach for CVS Earnings Next Week

CVS-iron-condor-earnings-options-play-november-2021

How to Approach an Iron Condor Earnings Trade

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.

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

Iron Condor Earnings Trade in CVS (CVS)

CVS is due to announce next week. So let’s take a look at a potential trade.

The stock is currently trading for 89.10.

cvs-stock-chart-october-29-21

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 seven days can be seen in the pale orange colored bar below. The expected move is from 85.50 to roughly 92.50, for a range of $7.

CVS-expected-move-earnings-options-play-november-2021

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 85.50 to 92.50.

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 CVS for the November 5, 2021 expiration, we can see that the 93 call strike offers a 79.67% probability of success and the 92 strike offers us a 73.85% probability of success. For this example, I’m going with the more conservative strike, which is the 93 strike.

CVS-earnings-options-play-iron-condor-november-2021-calls

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 85.50. The 85, with a 79.90% probability of success, works.

CVS-earnings-iron-condor-puts-november-2021

We can create a trade with a nice probability of success if CVS stays between our 8-point range, or between the 93 call strike and the 85 put strike. Our probability of success on the trade is 79.67% on the upside and 79.90% on the downside.

I like those odds.

Here is the trade:

Simultaneously:

Sell to open CVS November 5, 2021 93 calls

Buy to open CVS November 5, 2021 95 calls

Sell to open CVS November 5, 2021 85 puts

Buy to open CVS November 5, 2021 83 for roughly $0.54 or $54 per iron condor

Our margin requirement is $146 per iron condor.

Again, the goal of selling the CVS iron condor is to have the underlying stock, in this case CVS, stay below the 93 call strike and above the 85 put strike immediately after CVS earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 87.95% (call side) and 86.67% (put side)
  • The maximum return on the trade is the credit of $1.50, or $150 per strangle
  • Break-even level: 293.50 – 324.00
  • 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.

In Summary – A Quick Comparison Between an Iron Condor Earnings Trade and a Short Strangle Earnings Trade

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 95 strike and the 83 strike and bring in just as much as our iron condor. The difference is an iron condor approach requires less capital and is risk-defined. 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 95 call and 83 put strikes would be roughly 88% to 89% on the trade. 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.

2 comments on “Trade Idea: My Iron Condor Approach for CVS Earnings Next Week

  1. Ankur Shah on

    Hi Andy,

    Thanks for sharing your strategy on trading earnings. I had a few clarification questions.CVS is scheduled to report earnings on November 3rd before the open. Would you look to close the position on the day of the results or would you wait until the expiry day on Nov 5th?

    Is the max profit potential calculated as $0.54 / $1.46 the premium received divided by the margin amount (37%)? So, would you look to close the position for $0.25 or better?

    Reply
    • Andy Crowder on

      I typically close out the position shortly after the announcement is made. I typically never hold through expiration. Hope this helps.

      Reply

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