Rolling An Iron Condor Earnings Trade

Download The "Ultimate" Options Strategy Guide

Iron condor: In tonight's video, we’re going to go over all the trades that we made on Wednesday, April 22nd. We had a kind of interesting day. Most notably apparently were just dealing with earnings right now. A lot of the trades that we’re doing right now since we’re in the bulk of earnings season are going to be focused on earnings, and we’ve talked about that for a couple of weeks heading into today.

The two trades that we closed out of today completely, the first one is in YUM, ticker symbol YUM and then the next one is in Chipotle, CMG. Now, the YUM trade was a pretty decent trade. We probably could’ve held onto it a little bit longer, but our whole goal with earnings trades is just to take advantage of that one-time event where implied volatility gets crushed right after they announced earnings.

And that happened in YUM, and we saw that happen, but it did move up higher towards our breakeven point. And we’ve sold the straddle, so we had a lot of margins out there. We didn’t want to leave that margin out there all day. We ended up buying this back fairly soon after the market opened for about a 330 debit. It gave us about a $45 profit, so a subtle gain in YUM, apparently nothing to ride home about, but it was a nice little profitable trade that helped out.

Here's the chart here if I can get my fingers in typing right. Here’s the chart here of YUM and you can see the stock had a pretty good jump, it was moving towards our breakeven point up above 84, but had a nice drop in implied volatility as soon as the stock opened and after it announced earnings. It ended up being a pretty good trade.

We traded it high in implied volatility. That was the whole goal. And that worked out doing the straddle or, doing the straddle, in this case, led us to be profitable. If we had done an iron condor or even a strangle at that point, we probably wouldn’t have been as profitable as we were even though it was only about $45.

Related "Iron Condor" Resources:

iron condor

For CMG, this one was just a story of getting out of the trade before it got worse. We got out of this trade early in the morning. CMG opened up lower. We had tilted our strategy just a little bit bullish. We thought that maybe Chipotle would blow out earnings a little bit or expectations. The complete opposite happened.

I think everyone was expecting Chipotle to have a good quarter and the opposite happened, and the stock opened up lower, and it did open up above our short strike which was 650. Now, that was key because as we always talk about, we try to get out of these trades or adjust them pretty quick after the market opens and we find that that’s usually the best time to do things not to wait around.

Now, we did get out of this trade by buying back just the put spreads, so we only bought back the put spread which was below the market. We didn't worry about the call spread because that’s obviously going to be worthless. We’re not going to spend the money to buy back that call spread. We still have it. We’re going to let it expire worthless. It’s about 100 points out from where the market is trading right now.

And we did buy back this put spread for a 190 debit. That gives us a total $6 profit which doesn't even really cover commissions, so a small loser after commissions, but a scratch trade on Chipotle. Now, what’s critical here is that the best trade that you could’ve had in this particular instance with Chipotle was right on the market open. You can see the stock opened and that was pretty much the highest it traded all day.

It finished down at 641 which was below both of the put options that we had traded on the vertical spread. That means if you held on throughout the rest of the day, in this particular case, you would’ve incurred probably a couple of hundred dollar loss, so being diligent in closing out this trade early actually saved you a lot of money.

If you didn’t make any money, at least you didn’t lose a bunch of money. And then you can see we did get that nice drop in implied volatility which we expected and that was obviously pretty violent, that happened quick after the open.

Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush. And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Click here to view all 10 lessons ?

Alright, switching gears now. And this is what sometimes stinks about trading. I got, to be honest with you guys. If you happen to be somebody who was a little bit lackadaisical and didn’t get out of your McDonald's trade early or roll it when we rolled it, you probably ended up with a better trade than we have on right now. And that’s just part of trading. Sometimes it happens. If you were late in Chipotle, you lost more money.

If you were late in McDonald's today and didn't do anything until later in the day, you probably closed the trade with a small profit or probably a pretty decent profit if you close it towards the latter end of the day. McDonald’s was all over the place today. And let me just actually go the charts here, so you guys can see where McDonald's was trading. And we didn’t want it trading higher than our short strikes at 98.

That was ideally where we wanted the stock to trade, is somewhere under 98. And we’re just letting the platform load up here and the chart load up here. Alright, you can see stock was all over the place. Look at a range of this thing from today. It traded almost as high as $100, about as low as $96, ended the day at $97.84.

If you waited all throughout the rest of the day, you’d probably ended up with a pretty good trade, probably a small winner or a pretty decent winner if you did nothing throughout the day. In this one example, probably waiting turned out to be the right thing. But we were a little bit more diligent and systematic in how we did things.

It opened up higher towards our call strike, so we did go through our progression of rolling out our call spread and then adding the put spread right below the market and creating a butterfly. Now, in this case, it was interesting because we did see implied volatility jump in McDonald's after earnings which is very rare to see.

But in this case, it's apparently justified that implied volatility dropped because the stock was all over the place today. It had almost a $4 or $5 range in just one single day of trading, and that’s a huge range for a company like this to be trading $4 or $5 on one particular day. It's justified that implied volatility was all over the place. I think over the next couple of days it will calm down.

That will help our remaining position that we have in McDonald's. As long as the stock stays pretty much sideways over the next couple of days, we should turn a little bit of a profit here in McDonald's if possible. Again, just the logistics of what we did. The first roll that we had or the first thing we did was roll out our call spread side. All we're doing is taking the position and moving it from the April weeklies to the May full month contracts.

Now, we kept the same strike prices; we’re not changing those at all, the 98/99 call spread. To roll this thing out to the next month only cost us a $5 debit, so it’s not too bad at all. In most cases, you might pay a little bit higher than that. More notably on our Netflix earnings trade that we had to roll last week, we paid much higher than a $5 debit.

This was pretty good pricing I think to roll it out to the next contract month, and that was helped mainly by the fact that implied volatility was much higher so that apparently helped in your rolling into higher implied volatility. Now at the same time, we went ahead and sold another put spread below the market at 98/97. You’ll see our short strikes are the same at 98.

That means we have a butterfly now right over the market at 98 and we took in about $.40 on just this put spread side. Overall, the net roll, we took in about $.35 on each of the contracts that we rolled out, so a net reduction in our cost of the trade and reduced the potential loss by almost 1/3rd in McDonald's if it never trades anywhere where we want it. But here’s where McDonald's is trading right about now.

You see know everything is centered right over 98. The stock is trading just under there. And at this point, all we’re doing is just trying to get ourselves an opportunity to make some money between now and expiration. And if McDonald's starts to see a drop in implied volatility and doesn’t move anywhere, then this thing is going to show a pretty good profit very quickly, and we’ll be pretty quick to manage this profit and take this thing off if it does start to show a profit.

We’re not going to hold this thing too much time at all before we try to close this thing out. As always, I hope you guys enjoy these videos. If you have any comments or questions, please add 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.