Probably, one of the problems a large number of traders face is identifying a reliable strategy with a higher probability to be exploited in a price movement with minimal risk. The trading of options can quickly become complicated with very intricate strategies and the use of correct tools, all which can be pretty overwhelming in light of the volatility witnessed in the markets around the time of an earnings report.
But here is a strategy that definitely offers clear-cut solutions – the earnings-oriented iron condor, created to give you an edge with a higher probability of success. By using a few simple steps, traders can generate up to an 80% win rate in trades to really capitalize on market volatility.
High-Probability Options Strategy
The strategy is based on a strategy of using the trade in iron condor options during earnings announcements made by a company. Within the strategic entry and exit points, the iron condor offers consistent gains in predetermined market conditions. How it works and why it is such a powerful strategy to win up to 80% of your trades.
Step 1: Choosing the Right Stock
Identify stocks that are likely to have big price movements due to earnings announcements. The stocks that have the greatest market influence, such as Nvidia, are likely to have large trading volumes near earnings, so they will be prime candidates for this strategy.
- Look for stocks that have recently had a price move in the few days before earnings. The stocks that have recently experienced a price move are going to be the most responsive to this strategy.
- Historical response to earnings: Review the response the stock has given in response to earnings announcements, if this will help the model improve its volatility gauges.
Step 2: Trade Setup for the Iron Condor
This iron condor is selling a call spread and a put spread. Each spread was placed at a level the reader would be unlikely to move past, so the trade has a high probability of expiring worthless and the profit is made. The following is how to structure it to maximize your wins at up to 80% of your trades:
- Choosing the Expiration Date
Expiration Date: Two days post-earnings is great. It limits the potential price action that could expose an option trade but captures heightened implied volatility, often prior to earnings.- More Chance to Expire Within Price Range: Options expiring within a short time, say one week or any shorter time, tend to have a higher probability to expire within a small, tight price range, thereby increasing the possibility to win.
- Striking the Right Strike
Trade around a 10 Delta, which is relatively rare with a low probability of going in-the-money; chances are only around 10%, or 80% to win, depending on the trade.- Sell call options when they are placed above the stock’s present price and have a Delta of 10, then sell put options below this price and again have them with a similar Delta.
- Buy Options for Protection: Buy options on strikes further out to cover the short strikes. Now, you have a buffered trade with capped risk at both ends.
- Initial Credit and Risk Exposition
- Capture Premium by Maximum Volatility: Since most of the earnings releases have inflated implied volatility, one tends to inflate an option premium. This fetches higher credit, and capital may reduce and return gain at times can be boosted as well.
- Compute net cash flow: The debit earned from selling the initial condor must be relatively huge so that in the unfortunate case where the price actually does move against one when one has a big enough potential loss.
Trade Step 3: When Do I Close?
As soon as the earnings announcement is out, and the stock responds, volatility tends to crash hard, a phenomenon known as the “volatility crush.” This drop in volatility drives the value of the options down, meaning you can close the position at a profit.
- Track the value of trade in the morning following the earnings. It becomes less valuable; in the case that it still stays within the range, one can get out buying a put and call spread.
- Closing It Profitably: You can take the trade to close the position at a profit and buy back the iron condor. The “volatility crush” lowers options’ value rapidly and almost always leaves you with good profit within a day.
Why This Strategy Has Probability of Winning 80%
This strategy wins for myriad reasons due to its placement:
- Options Selling with Lower Delta: When you sell options that have a 10% chance of expiring in-the-money, you are setting the trade up to win 80% of the time.
- Breathing Room: The setup for this strategy around the volatility at earnings will give you a wider “breathing room” in which the stock can move. A range such as this will ensure a high probability that the iron condor expires worthless.
- This Benefits from Volatility Dynamics: With the high volatility in pre-earnings, it puffs the prices of options up such that the trader is paid a better credit. Now that the earnings are over, and volatility re-collapse the options price, so traders will be taking a profit out from the said lower value.
Earning Iron Condor Trade Example
Let’s assume that you will be trading in this strategy just before big earnings news on Nvidia strikes:
- Stock Position: At $700 stock price.
- Call Choice: Selling a call with strike at $840 and a put with strike at $590, both with about 10 Delta.
- Protection: Buying a call at $845 and a put at $585 to provide more protection on risk.
- Credit Received: Assume the entire premium for this structure is $1,820.
- Post-Earnings: As the morning is passing after reporting earnings, the stock traded but yet is within a range of your chosen strikes. Sold options are suffering from volatility crush resulting in the ability to get out with profit.
If you do that in the trade, the winning percentage of this strategy is going to be about 80%. That is if the actual price of the stock had not exceeded the range in which you had anticipated setting the strikes.
Irrigation End
- Timing is Everything: Take on two days before an earnings release and close position that morning for maximum possible return.
- Volatility Crush: This post-earnings event is crucial when crushing the price of an option; therefore, you make the profit.
- Sell at Odds on Probability: Selling your options at 10-delta puts you in a very low-risk advantage since there were statistical chances that this kind of option would probably expire.
- Set Realistic Gain: You will exit from the trade at a pre-determined gain so as to avoid uncertainty of the outcome post-release of the news.
Conclusion
Earnings season is usually the sweet spot for the options trader, especially in the use of strategies such as the iron condor. The right choice of strike prices and entries around the earnings reports can make for a winning streak. With the earnings iron condor, you can profit off market volatility without excessive risk through a streamlined, high-probability approach. Learn this easy options strategy and see how fast you can start winning up to 80% of your trades and creating a solid path to trading success.