Arista Networks (ANET) is due to report earnings after the market close on February 18th. The Barchart Technical Opinion rating is a 96% Buy with an Average short term outlook on maintaining the current direction.
ANET rates as a Strong Buy according to 13 analysts with 1 Moderate Buy rating, 4 Hold ratings and 1 Strong Sell rating.
Implied volatility is 57.96% which gives ANET an IV Percentile of 94% and an IV Rank of 65.70%.
Arista Networks, Inc. is engaged in providing cloud networking solutions for data centers and cloud computing environments.
The company offers 10/25/40/50/100 Gigabit Ethernet switches and routers optimized for next generation data center networks.
Arista uses multiple silicon architectures across its products. At the core of the company's cloud networking solutions is the Linux-based Extensible Operating System (EOS), which was architected to be fully programmable and highly modular.
EOS supports leading cloud and virtualization solutions, including Microsoft System Center, OpenStack and other cloud management frameworks.
The company co-authored the Virtual Extensible LAN (VXLAN) protocol specification with VMware and was the first to demonstrate VXLAN integration. Moreover, it has now expanded VXLAN routing and integration.
Arista Networks Earnings Iron Condor
Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Trade Setup
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the February 21st expiry, we could sell the $102.50 put and buy the $97.50 put. That spread could be sold yesterday for around $0.80.
Then the bear call spread, which could be placed by selling the $135 call and buying the $140 call. This spread could be sold yesterday for around $0.55.
In total, the iron condor will generate around $1.35 per contract or $135 of premium.
The profit zone ranges between $101.15 and $136.35. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.35 x 100 = $365.
Therefore, if we take the premium ($135) divided by the maximum risk ($365), this iron condor trade has the potential to return 36.99%.
If price action stabilizes, then iron condors will work well. However, if ANET stock makes a bigger than expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss.
Conclusion And Risk Management
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
