Palo Alto Networks (PANW) is due to report earnings after the market close on November 15th. The Barchart Technical Opinion rating is a 64% Buy with a weakest short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
PANW rates as a Strong Buy according to 31 analysts with 3 Moderate Buy rating and 3 Hold ratings. Implied volatility is 46.44% which gives PANW an IV Percentile of 90% and an IV Rank of 72%.
Palo Alto Networks, Inc. offers network security solutions to enterprises, service providers and government entities worldwide.
The company's next generation firewall products deliver natively integrated application, user, and content visibility and control through its operating system, hardware and software architecture.
It serves the enterprise network security market, which includes Firewall, Unified Threat Management, Web Gateway, Intrusion Detection and Prevention and Virtual Private Network technologies.
Through its products and subscription services, Palo Alto provides integrated protection against dynamic security threats while simplifying the IT security infrastructure.
Its solutions incorporate application-specific integrated circuits, hardware architecture, operating system, and associated security and networking functions.
The company's network security gateways protect customer data, reduce security complexities and lower total cost of ownership.
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.
PANW 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 while expecting that the stock will not move too much in either direction.
First, we take the bull put spread. Using the November 17th expiry, we could sell the $220 put and buy the $215 put. That spread could be sold yesterday for around $0.80.
Then the bear call spread, which could be placed by selling the $270 call and buying the $275 call. This spread could be sold yesterday for around $0.65.
In total, the iron condor will generate around $1.45 per contract or $145 of premium.
The profit zone ranges between $218.55 and $271.65. 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 – 1.45 x 100 = $355.
Therefore, if we take the premium ($145) divided by the maximum risk ($355), this iron condor trade has the potential to return 40%.
If price action stabilizes, then iron condors will work well. However, if PANW 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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
