Using Iron Condors for ER Plays

DAL Earnings Trade Plan

My favorite strategy to play earnings releases is to take advantage of overnight IV crush on an iron condor entered just before an earnings announcement on underlying US equity options that have demonstrated low price movement the day after earnings. Exit is the following day. To qualify as a candidate, the strategy must have had a 75% win/loss ratio over the past four to five earnings releases on the underlying stock.

An Earnings Iron Condor sells a bull put credit spread concurrently with a bear call credit spread at the end of the day before earnings. The short strikes are chosen based on the underlying stock’s price +/- the value of an at the money straddle premium. The long legs used are the short strike minus $1 for the put credit spread and the short strike plus $1 for the call credit spread.

For example, Delta Airlines (DAL) reported earnings before market open on January 13th. At the close on January 12th, DAL was trading at $40.61. The at the money DAL Jan14 straddle ($41 call + $41 put) premium was $1.79. This set up the short legs of an iron condor with $39 puts ($40.61 minus $1.79 = $38.82 rounded up) and $42 calls ($40.61 plus $1.79 = $42.40 rounded down) and the long legs with $38 puts and $43 calls. Expiry for Earnings Iron Condors is always the closest possible weekly options. Position sizing is based on taking a max risk of $500. 

Past results of Earnings Iron Condors on DAL earnings releases are as follows:

Jan 13, 2021: +29.4% ROI

Apr 15, 2021; +15.9% ROI

Jul 14, 2021: +22.9% ROI

Oct 13, 2021: -49.3% ROI

Jan 13, 2022: +25.8% ROI

Here is a summary view of the Jan 13, 2022 trade using 7 contracts showing a max risk of $462 and a potential profit of 51.52% ROI on risk.

Exit of an Earnings Iron Condor is always at the end of day following earnings, win or lose. In the case of the above play on DAL, the play was exited (bought back) in the last few minutes of the trading day on January 13th. 

The next earnings release for DAL is before market open on Wednesday, April 13th. I plan on entering an Earnings Iron Condor on DAL within the last 5 to 10 minutes of market open on Tuesday, April 12th if the total potential ROI is greater than 35% ROI.

Responses

Your email address will not be published.