Looking At An HD Earnings Iron Condor For Next Week

Home Depot (HD) is due to report earnings this Tuesday before the opening bell. The Barchart Technical Opinion rating is an 8% Sell with a Weakest short term outlook on maintaining the current direction. 

HD rates as a Strong Buy according to 10 analysts with 2 Moderate Buy and 6 Hold ratings. Implied volatility is 30.02% which gives HD an IV Percentile of 64% and an IV Rank of 45.48%

The Home Depot Inc. is home improvement specialty retailer with retail stores across the globe. It offers a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, decor products and related services. The company operates throughout the United States, Canada and Mexico. It also functions through a network of distribution and fulfillment centers, as well as a number of e-commerce websites. The company typically serves three primary customer groups: Do-It-Yourself, Do-It-For-Me, Professional Customers. DIY Customers: These customers are usually homeowners, who prefer purchasing products and completing installations on their own. DIFM Customers: These customers are usually homeowners, who purchase products on their own and employ third-parties to complete the projects and installations. Professional Customers: This customer segment mostly comprises professional remodelers, general contractors, repairmen, small business owners, and tradesmen.

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.

HD IRON CONDOR

Home Depot is sitting right in between the 50 and 200 day moving averages. Traders that think the stock might stay within that range over earnings could look at an 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 August 19 expiry, we could sell the 290 put and buy the 285 put. That spread could be sold yesterday for around $0.50.

The 290 strike roughly coincides with the 50-day moving average.

Then the bear call spread, which could be placed by selling the 330 call and buying the 335 call. This spread could be sold yesterday for around $0.55.

In total, the iron condor will generate around $1.05 per contract or $105 of premium.

The profit zone ranges between 288.95 and 331.05. 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 – 1.05 x 100 = $395.

Therefore, if we take the premium ($105) divided by the maximum risk ($395), this iron condor trade has the potential to return 26.6%.

If price action stabilizes, then iron condors will work well. However, if HD 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. HD 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.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, August 11, 2022.

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