Earnings season is in full swing over the next 3 days, with reports from the largest tech companies in the world. Below are the expected moves from options market for some of these stocks, as well as the actual moves the companies saw in recent earnings (starting with the most recent).
Tuesday after the close
Apple AAPL / Expected Move: 3.6% / Recent moves: 0%, -4%, -6%
Microsoft MSFT / Expected Move: 2.7% / Recent moves: -3%, 0%, -5%
Alphabet GOOGL / Expected Move: 3.5% / Recent moves: +3%, +7%, +4%
Wednesday after the close
Facebook FB / Expected Move: 4.6% / Recent moves: +7%, -3%, -6%
Thursday after the close
Amazon AMZN / Expected Move: 3.8% / Recent moves: 0%, -2%, -5%
The Options AI Earnings Calendar is a free resource to keep up-to-date on upcoming earnings, how options are pricing potential moves and how that compares to actual moves from prior earnings (starting with most recent). Whether looking to buy outright Calls or Puts, or to reduce capital outlay through Spreads, the expected move can be a valuable tool in both strategy and strike selection.
One strategy that might be used to directly target the expected move is an Iron Condor. An Iron Condor is sold at a credit. It consists of credit call spread, and a credit put spread (the wings). The trader looks for a stock to stay within a range (between the short strike of each wing) to collect the credit. When set at the expected move as the chosen range, the Iron Condor is essentially positioning that options have over-priced a move.
Below, we’ll look at the risk/reward of some sample Iron Condors into each of these earnings. The strikes are based upon where the stock is trading at the time of writing and will change with stock moves prior to each announcement. The options expiration date used in all examples is this Friday. These are not trade recommendations… some of these stocks may move beyond their expected move, others may stay within. However they may be a useful way to highlight some of the key features of condors, expected moves, and credit spread trading in general.
Apple AAPL, $5 wide wings
Microsoft MSFT, $2.50 wide wings
Alphabet GOOGL, $10 wide wings
Facebook FB, $5 wide wings
Amazon AMZN, $10 wide wings
The charts above help illustrate how the Iron Condor works. The range, in this case, is set at the expected move (as shown by the cone in the future). The red and green areas show the risk/reward of the trades, and the grey lines show the trade breakevens.
The risk (or max loss), is not the combined max loss of each Credit Spread. That’s because the stock can only move in one direction or the other. One spread will be max gain regardless of what happens.
Traders use Iron Condors for several reasons, including selling implied volatility when it is high. In the case of earnings, implied is usually higher into the event than it is after. But with such a short time to expiration, the trade examples above are fairly binary – either these stocks stay within their expected move by Friday, or they don’t. Options were either overpriced or underpriced. The Iron Condor, set at the expected move, is expressing a view that options are overpriced, or just right.
The probability of profit of the above trades are all similar (based on their breakevens) but the risk/reward can differ. Those types of inputs are important to consider when credit spread trading.
Based upon publicly available information derived from option prices at the time of publishing. Intended for informational and educational purposes only and is not any form of recommendation of a particular security, strategy or to open a brokerage account. Options price data and past performance data should not be construed as being indicative of future results and do not guarantee future results or returns. Options involve risk, including exposing investors to potentially significant losses and are therefore not suitable for all investors. Option spreads involve additional risks that should be fully understood prior to investing. Securities trading is offered through Options AI Financial, LLC a registered broker-dealer.
