Today, we're looking at another earnings iron condor, this time on Salesforce.
Salesforce is due to report on Nov. 30 after the closing bell.
Salesforce stock is currently showing an implied volatility percentile of 94%. That 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 CRM stock, and one popular strategy for earnings trades is to sell an iron condor.
Market Expects 10% Move On Earnings
For Salesforce earnings, the options market is pricing in a move of 9.7% in either direction.
Salesforce stock has stayed within the expected range following three of the last six earnings announcements.
Traders who think Salesforce stock will not move too much following this earnings report could look at an iron condor trade.
Let's look at an example of how we might set up an iron condor over earnings. 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 Dec. 2 expiry, we could sell the 135 put and buy the 130 put. That spread could be sold Wednesday for around $0.50.
Then we set up the bear call spread, which could be placed by selling the 175 call and buying the 180 call. This spread could be sold Wednesday for around $0.60.
Trade Generates $110 In Premium
In total, the iron condor will generate around $1.10 per contract, or $110 of premium.
The profit zone ranges between 133.90 and 176.10. This is calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is 5-1.10 x 100 = $390.
Therefore, if we take the premium ($110) divided by the maximum risk ($390), this iron condor trade has the potential to return 28%.
If CRM stock stays within the expected range, then the iron condor trade will work well. However, if Salesforce makes a bigger than expected move, the trade will suffer losses.
Little Chance For Trade Adjustments
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 the IBD Stock Checkup, Salesforce is ranked No. 27 in its group and has a Composite Rating of 56, an EPS Rating of 74 and a Relative Strength Rating of 24.
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
