Deere Earnings: Iron Condor Could See 38% Return On Risk

Deere & Company (DE) is due to report earnings before the open on Friday. The Barchart Technical Opinion rating is a 40% Buy with a weakest short term outlook on maintaining the current direction. 

DE rates as a Strong Buy according to 10 analysts with 1 Moderate Buy rating and 7 Hold ratings. Implied volatility is 30.08% which gives DE an IV Percentile of 21% and an IV Rank of 26.63%.

Deere is the world's largest producer of agricultural equipment, manufacturing agricultural machinery under the iconic John Deere brand with its signature green and yellow color scheme. 

Deere is focused on revolutionizing agriculture with technology, in an effort to make farming automated, easier and more precise across the production process. Agriculture and turf operations has been divided into two new segments: The Production and Precision Agriculture segment is responsible for defining, developing and delivering global equipment and technology solutions that cater to production-scale growers of large grains, small grains, cotton, and sugar. 

The Small Agriculture and Turf segment will deliver products to support mid-size and small growers and producers globally and turf customers. Deere also manufactures and distributes road building equipment through its wholly-owned subsidiaries of the Wirtgen Group.

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.

DE 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 February 17 expiry, we could sell the 390 put and buy the 385 put. That spread could be sold yesterday for around $0.70.

Then the bear call spread, which could be placed by selling the 430 call and buying the 435 call. This spread could be sold yesterday for around $0.70 also.

In total, the iron condor will generate around $1.40 per contract or $140 of premium.

The profit zone ranges between 388.60 and 431.40. 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 – 1.40 x 100 = $360.

Therefore, if we take the premium ($140) divided by the maximum risk ($360), this iron condor trade has the potential to return 38.89%.

If price action stabilizes, then iron condors will work well. However, if DE 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. DE has stayed within the expected range following three of the six 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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