After last week's successful iron condor on Proctor & Gamble, today we look at a similar idea on Apple. Apple stock is due to report earnings on Thursday after the closing bell. With a higher implied volatility, selling an iron condor has the potential to benefit if AAPL stock doesn't move too much.
Why An Iron Condor?
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. It also helps if there is a decrease in implied volatility and the stock price doesn't move too much in either direction.
AAPL stock is currently showing an implied volatility percentile of 88%, which means options are very expensive compared with the recent past.
That could mean it's a good time to be a seller of options on Apple stock. The iron condor does that through two credit spreads.
The options market is pricing in a move of 5.1% in either direction for Apple stock. For five of the last six earnings announcements, Apple stock stayed within its expected range.
Traders who think AAPL stock will not move too much following this earnings report could look at an iron condor trade.
Here's how to set up the iron condor over earnings.
Setting Up The Trade For Apple Stock
First, we take the bull put spread. Using the Oct. 28 expiry, we sell the 140 put and buy the 135 put on Apple stock. That spread sold yesterday for around $0.60.
For the bear call spread, we use the same expiration. In this case, we sell the 157.50 call and buy the 162.50 call on Apple stock. This spread sold yesterday for around $0.55.
In total, this iron condor trade generated around $1.15 per contract or $115 of premium. If Apple stock finishes between the short strikes of 140 and 157.50 at expiration, the iron condor trade will achieve maximum profit. All the options will expire worthless, and the trader keeps the entire $115 premium.
The trade is still profitable as long as Apple stock finishes at 138.85 to 158.65 at expiration. This calculation takes the short strikes and adds or subtracts the premium received (140 - 1.15 = 138.85 and 157.50 + 1.15 = 158.65).
To calculate the maximum loss, take the difference of the spreads and subtract the premium. Since both spreads are $5 wide, the maximum risk in the trade is 5 – 1.15 x 100 = $385.
Therefore, if we take the premium ($115) divided by the maximum risk ($385), this iron condor trade has the potential to return 29.9% in just a few days.
Managing The Trade
With the options expiring on Friday afternoon, there is little chance for adjusting after the earnings announcement. As such, the trade could be exposed to assignment risk.
According to IBD Stock Checkup, Apple stock ranks No. 1 in its group and has a Composite Rating of 82, an EPS Rating of 84 and a Relative Strength Rating of 72.
Separately, this cash-secured put on SLB, formerly known as Schlumberger, has already seen profits of $160 per contract. It's OK to lock in the profits and close the trade.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
