Trading an Iron Condor During Earnings

Posted on Tuesday, September 17, 2019 at 6:09 PM

We are getting closer to another round of quarterly earnings, so this may not be the best time to talk about a relatively neutral strategy. But I think it is always a good idea to learn more about different option strategies.

An iron condor is a market-neutral strategy that combines two credit spreads. A call credit spread is implemented above the current stock price, and a put credit spread is implemented below it. The objective of any credit spread is to profit from the short options’ time decay while protecting the position with further out-of-the-money long options.

The iron condor is simply combining both the call and put credit spreads as one trade. The trade is based on the possibility of the stock trading between both credit spreads by expiration. Let’s use ABC stock as an example. If you have noticed that the stock has been trading between a range of $75 and $80 over the past few weeks, an iron condor might be an option with an expiration from about a week to about a month.

A call credit spread with the short strike call at 80 or higher would profit if the stock stayed below $80 at expiration. A short strike put at 75 or lower would profit if the stock stayed at $75 or higher at expiration. Both short options would need to be protected by further out-of-the-money (OTM) long options. Both spreads would expire worthless and both premiums are the traders to keep if ABC closes at or between the short strikes. The total risk on the trade is also reduced because of both premiums received.

Max profit is both credits from each credit spread. Max risk is the difference in one set of strike prices minus both premiums received. Maximum loss would occur if the stock is at or below $75 or at or above $80 at expiration. No matter what happens, one of the credit spreads will always expire worthless. This of course does not guarantee a profit though.

Now getting back to earnings, there is a trade-off as with everything about options. Expirations that take place after the announcement have higher IVs, which means the option premium is higher than it might be if the company were not announcing. Sine the iron condor is two credit spreads, this is a good thing. The trade-off is that the company is announcing, and there will most likely be a gap higher or lower that may pierce the call or put spread. The bottom line is there is a little more luck involved. But as long as an option trader understands the trade-offs and the risk/reward, this could be an option so to speak.

Iron condors are a great way to take advantage of time decay when it looks like the stock will be traveling in a range for a certain amount of time. The key is to have your profit and loss parameters set before entering the trade, but that may not be so easy when earnings are in the mix.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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