We might examine a strategy similar to recent profitable profits iron condors using Starbucks stock. Starbucks (SBUX) is expected to report on Thursday after the closing bell, and since you will be selling for a credit, the iron condor now benefits from higher implied volatility.
Recall that an iron condor combines a bear call spread with a bull put spread. You get a credit to your account for the premium when you sell an iron condor. If the options expire worthless, the credit is still yours.
The goal of the trade is to capitalize on time decay while anticipating limited movement in the stock’s price.
Currently, the implied volatility percentile for Starbucks stock is 86%. This means that in comparison to former years, alternatives are very pricey. Take advantage of the greater volatility by selling options.
The options market is pricing in a 5.7% change in either direction for Starbucks earnings. Following four of the previous six earnings reports, SBUX stock remained inside the anticipated range.
According to MarketSmith pattern identification, SBUX stock has just developed a flat base with a depth of just 12%. SBUX is ranked No. 29 in its sector by IBD Stock Checkup, with a Composite Rating of 51, an EPS Rating of 43, and a Relative Strength Rating of 70.
Investors who believe SBUX stock won’t move significantly after these earnings should consider this iron condor trade.
Take the bull put spread first. We sell the 81 put and buy the 76 put using the Nov. 4 expiry. Yesterday, that spread sold for about $0.50.
The identical expiration is used for the bear call spread, and we sell the 92 call and buy the 97 call. Yesterday, this spread also sold for roughly $0.50.
A total of $100 in premium was produced by the iron condor, or around $1 per contract. Today, the overall premium for an iron condor is generally around that same level, albeit the premium for each spread varies slightly.
With the $1.00 premium, the mathematics for the trade are rather simple. On SBUX stock, the profit zone spans from 80 to 93. Simple math dictates that you should deduct the $1 premium from the short put at 81 and add it to the short call at 92.
The maximum profit is $100, which was the premium paid for this Starbucks iron condor.
The maximum risk simply deducts the premium from the strikes’ distance of 5, which is the same for both spreads. Therefore, the trade’s maximum risk is 5 – 1.00 x 100 = $400.
Therefore, this iron condor trade has the potential to return 25% in just a few days if we split the premium ($100) by the maximum risk ($400).
Featured Image- Megapixl @RobertWei
Author Valerie Remorosa