At tastylive, we like options earnings plays. During the period leading up to the equity’s earnings, there is often a spike in implied volatility rank as uncertainty builds about what the earnings number will be. But, as we’ve explored in the past, the expected move number given before earnings can overstate the actual move.
What does this mean for traders? This means that earnings trades set up opportunities to collect more premium than usual, allow us to widen the strikes between long and short options, and improve our probability of profit (POP).
Given that actual moves can be overstated by expected moves, we like using the iron condor strategy around earnings (at times, however, the actual moves can jump wildly beyond expectations).
An iron condor combines an out of the money short put spread with an out of the money short call spread. This creates a range around the underlying’s price in which we can profit, while being a defined risk strategy (meaning that it limits profitability, but also losses). Since an iron condor involves selling a call spread and a put spread, we will collect a credit from this trade.
Traditionally, tastylive research has looked at iron condors for which 1/3 the width of the strikes (distance between the short and corresponding long legs) is collected as a credit, and how this type of trade fared during earnings plays (which are put on before earnings and taken off shortly after the announcement). But, a chicken iron condor calls for collecting 45-50% of the strike width in credit by tightening the short strikes. How does this strategy stack up?
Looking at $AAPL, $NFLX, $AMZN, $GOOG, and $MA over the last two years, we tested 1/3 strike width iron condors, chicken iron condors, and iron condors with short strikes 1 standard deviation out-of-the-money. The profit and loss, number of winners, probability of winners, and max losses are shown for each strategy, with fascinating results illuminating the pros and cons of different iron condor strategies.
When choosing a strategy, it is important to take risk tolerance into account. Each strategy tested assumes different levels of risk and max losses, metrics that can be useful for placing earnings trades.
In summary, chicken iron condors are defined risk trades that allow us to limit risk by limiting profitability. They are an interesting earnings trade strategy, and can allow for traders to take advantage of heightened IV rank and premium.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.