All About Iron Condors & Earnings Trades

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Iron condor: In today's video, we’re going to go over all of the trades that we made for Thursday, January 22nd. We had a pretty decent day as far as closing trades and a good day with opening a lot of new iron condors. It seems like we’re doing a lot more of these, but it’s just what the market is giving us and what’s fitting our style right now. As far as closing trades, let’s cover those first. We had two earnings trades, one in SNDK and one in UNP.

And both of those trades, we closed it out. They pretty much scratch in my opinion. SNDK, we closed out for the same debit that we received as a credit yesterday, and for UNP, we closed it out for a $.12 debit, so a small $36 profit in this one. In both cases, with SanDisk first of all, it opened at the lower end of its range.

We're pretty quick about closing out this trade and always hindsight is 20-20. If we just waited maybe 10 more minutes into the trading day, it started to rally back and ended up being a full winner if you held it towards the end of the day. In this case, if you didn’t have the ability to close it out quickly, it’d work in your favor.

Not that it always happens that way, but in this case, it did. We did see that drop in implied volatility we were looking for, it was awesome, but we closed it out as it did open up near the lows of its expected move and definitely on the heels of our position, so we didn’t want to see that thing turn into a loser. The same thing with UNP. UNP opened early and rallied very quickly much higher above our short strikes on the topside at 119 and rallied up to the 121 regions in the morning.

As it was doing that, we saw a little bit of a drop in the stock price right after the opening bell, and we were able to close it out with a small profit. You probably would’ve ended up with actually a loser at this point with UNP because of where it closed today, but you had an opportunity throughout the day to take a nice profit off on this trade regardless.

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iron condor

As far as new trades go, we did have a bunch of new trades that we’re entering today. The first one that we’ll go over is our eBay trade, and it’s an iron condor all the way out in March. Now, what happened with eBay is that they announced earnings today, and we did not play earnings, but the implied volatility of the stock earlier this morning did not drop yet, so most of the options still had a lot of their juice left, and as market participants were repricing the options, implied volatility was dropping.

But at the time we entered this trade, implied volatility is pretty high, and we wanted to get a lot of premium on eBay, so we decided to sell the March 60/62.5 call spread, and the 50/57.5 put spread. That means that we want eBay to trade about in between 60.5 and 50.5 or so as far as a price going forward. When we look at eBay right now, you can see implied volatility has already started to drop which helps, the stock has had a huge move up today well, well beyond its expected range move, so that was good that we didn't end up making a trade on eBay.

But going forward, it's okay because we do have our strike prices up here at 60 and then our lower strike prices down here at 50. You can see as the stock opened up today within the higher implied volatility, we have a nice profit window here where we can let the stock expire with an inside of this window and still make some good money on this trade. We like this trade going forward. We’ll see how it goes. We did it subtly, only doing one lot in this trade, as always, just to keep our position sizes small.

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With GLD, our next trade, this is technically an iron condor because we are doing a call spread and a put spread, but this is an iron butterfly. Now, if you don't know what an iron butterfly is, we'll go over it here. But we have a new video tutorial that we added to the video section and the library that describes an iron butterfly in a lot of detail using this example that we have here today. The iron condor in GLD was the 126/131 call spread and the 126/121 put spread.

You'll notice that what makes this iron butterfly is the fact that both of these short strikes at 126 on either side are the same price. And what we did on the ends of this butterfly or this condor (however you want to look at it) is we went out about $5 on either end and bought those options, so the 131 calls and the 121 puts. This gave us a massive credit, and that’s what we're trying to do, it’s about $390 on this trade.

And actually, it provides us with a huge window of opportunity to make some money on GLD. It is an additional position to the one that we currently have for February, so we’re not adjusting our February position that we have, but this is what that new iron butterfly looks like for gold. We’re leaving a little bit of room for gold to continue higher, but really, we want gold to trade anywhere between 122 and about 130 or so.

Now risk reward on this trade, it's an excellent risk reward trade because with high implied volatility, you get these option premiums that are so swelled that in this case, we’re only risking about $110 to possibly make at most about $390. But actually, we’re targeting something around $200, so our risk reward is about 2:1 ratio which is good for this trade.

The reason that we decided to go with something a little bit more aggressive as far as option selling is because implied volatility is still very, very high in gold. The IV percentile is still up at 69 which is extremely high. And you can see that the stocks had a huge, huge run, so we’re just expecting maybe a little bit of continued move up or a little stabilization here as we head towards expiration.

We did also add two new earnings trades to the mix, both of them iron condors just because we didn’t want to do these naked and take up a lot of capital. In MCD, we decided to do the same thing that we did here with GLD and create an iron butterfly. We did the February 90.5/95 calls, and the put side, we did the 90.5/86 puts. We did the same thing except with McDonald's. We decided to go out to February just because the weekly options for McDonald's didn't have a lot of premium.

We’ll go in here and look at this just a little bit here. You can see the weekly options were very, very liquid and there was no problem with liquidity at all in these weekly options, but the premiums that you got for trying to get outside of the expected move… Because the expected move is about $2 in McDonald's, so trying to get outside of that expected move takes you down around 88 or so, or takes you up around 93 or so.

And to sell options for $28 or $17, this doesn't give you a lot of premium. What we decided to do was go out to February, we pinned everything right around this middle strike at 90.5 and then went out an even distance on either side of the trade to create this iron butterfly. And we have that same profit loss diagram that we had with GLD where it’s got a very, very tall peak in the middle and we’re just trying to look for McDonald's to open up tomorrow inside of its expected range.

We should get a drop in implied volatility and be able to take maybe $50 to $75 out of this trade. That’s really what we’re targeting. We’re not trying to hit a homerun here and take $270 out of this trade. The last trade that we made today is an iron condor in COF which is Capital One. It also has earnings that are going to be reported tomorrow, so we did decide to make the February contracts as well in COF as we did in McDonald's.

For the same reason as McDonald's, we did the 77.5/80 calls and the 75/72.5 puts. In this case, we didn't do the iron butterfly, but it’s a very narrow iron condor in COF. And you can see this is what it looks like, a very narrow iron condor at the top, it doesn't have that peak like some of the other ones do, but it's a very narrow window, and we’re just trying to get outside of the expected range. But with this trade, magnificent risk reward.

We’re risking about $100 to possibly make about $150. We like the trade a lot. We think that Capital One can move somewhere inside of its expected range. Our breakevens are about 73.5 and about 79. And with Capital One pricing in about a $2 move in its stock after hours for earnings, we think that it’s going to be a pretty good trade going into the close tomorrow.

We’ll hope to see some drop in implied volatility as we get into tomorrow with both of these stocks and try to take off some of these earnings trades at a little bit better profit than we did today. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below. And until next time, happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.