Update 12/16/2021: I exited my iron condor earnings play on LEN the day after earnings were announced, for a $3.60 debit per contract/share, a profit before fees of $45 per contract. Shares were trading at $107.46, down $3.18 from the entry level.
The Implied Volatility Rank at exit was 50.0%, down 20.7 points from the entry level.
Under my preliminary rules for earnings plays, my goal is to exit with a profit, big or small. Trades based on earnings have narrower profit zones than I would normally construct; the profit comes from the decline in implied volatility that almost always accompanies an earnings announcement. So the usual rule of exiting at 50% of maximum potential profit with any profit 21 days before expiration don’t apply to earnings plays. Basically, it’s role the dice and, win or lose, move on.
Shares declined by 2.9% over one day for a -1049% annual rate. The options position produced a 12.5% return for a +4,563% annual rate.
I have entered a short iron condor on LEN, using options that trade for the last time 37 days hence, on January 21. The premium is a $4.05 credit per contract share and the stock at the time of entry was priced at $110.64
The Implied Volatility Ratio stands at 70.5%
The premium is 48% of the width of the positions short/long spreads. The profit zone covers a 7.6% move to the upside and a 9.0% move to the downside, for a total width of 16.6%.
The risk/reward ratio is 1.2:1, with maximum risk of $470 and maximum reward of $405 per contract.
How I chose the trade. I entered the trade the day of the earnings announcement after the closing bell. Options prices closest to expiration, discounted for days remaining, imply a move of $5.07 in either direction. Elliott wave analysis didn’t give a clear direction to the chart, and Zacks ranks the company as neutral with little expectation of an earnings surprise.
By Tim Bovee, Portland, Oregon, December 15, 2021
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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