AAPL Earnings: Iron Condor Could See 33% Return On Risk

Apple (AAPL) is due to report this Thursday after the closing bell. The Barchart Technical Opinion rating is a 72% Sell with an Average short term outlook on maintaining the current direction. 

AAPL rates as a Strong Buy according to 15 analysts with 2 Moderate Buy ratings and 3 Hold ratings. Implied volatility is 40.31% which gives AAPL an IV Percentile of 91% and an IV Rank of 80%

Apple's business primarily runs around its flagship iPhone. However, the Services portfolio that includes cloud services, App store, Apple Music, AppleCare, Apple Pay & licensing and other services which become the cash cow. 

Moreover, non-iPhone devices like Apple Watch and AirPod have gained significant traction. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods. 

Solid uptake of Apple Watch also helps Apple to strengthen its presence in the personal health monitoring space. Apple also designs, manufactures and sells iPad, MacBookand HomePod. 

These devices are powered by software applications including iOS, macOS, watchOS and tvOS operating systems. Apple's other services include subscription-based Apple News, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV, a new subscription service.

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.

AAPL 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 October 28 expiry, we could sell the 135 put and buy the 130 put. That spread could be sold yesterday for around $0.70.

Then the bear call spread, which could be placed by selling the 152.50 call and buying the 157.50 call. This spread could be sold yesterday for around $0.55.

In total, the iron condor will generate around $1.25 per contract or $125 of premium.

The profit zone ranges between 133.75 and 153.75. 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 – 1.25 x 100 = $375.

Therefore, if we take the premium ($125) divided by the maximum risk ($375), this iron condor trade has the potential to return 33.33%.

If price action stabilizes, then iron condors will work well. However, if AAPL 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. AAPL has stayed within the expected range following all six of the most recent earnings releases. Although as we know, past performance doesn’t guarantee future performance.

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.

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