Pfizer is showing elevated implied volatility with an IV Percentile reading of 96%.
That means that the current level of implied volatility is higher than 96% of all other readings in the past 12 months.
In part, that is because the company is due to report earnings before the opening bell on Tuesday, and we typically see elevated implied volatility around that event.
Pfizer stock has stayed within the expected range following the last six earnings announcements.
Traders who think Pfizer 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.
Try Iron Condor For Pfizer's 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 May 6 expiry, we could sell the 46 put and buy the 44 put. That spread could be sold on Friday for around $0.24.
Then the bear call spread could be placed by selling the 52 call and buying the 54 call. This spread could be sold on Friday for around $0.25.
In total, the iron condor will generate around $0.49 per contract, or $49 of premium.
The profit zone ranges between 43.51 and 51.49. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $2 wide, the maximum risk in the trade is 2.0 minus 0.49 x 100 = $151.
Potential Return Of 32% On Trade
Therefore, if we take the premium ($49) divided by the maximum risk ($151), this iron condor trade has the potential to return 32.45%.
If price action stabilizes, then iron condors will work well. However, if Pfizer 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. Pfizer stock has stayed within the expected range following all six of the most recent earnings releases. But as we know, past performance doesn't guarantee future performance.
According to the IBD Stock Checkup, PFE stock is ranked No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 88 and a Relative Strength Rating of 87.
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
