This is our fifth suggestion on how to carry out the Diagonal Condor Earnings Strategy on companies which are about to announce earnings. The first two suggestions (RHT and KMX) resulted in 40% gains in a single week when the stock fluctuated only moderately after the announcement.
One of these times, the stock is likely to fluctuate more than we would like, and we will be able to put the second part of the strategy to work. This will involve selling out-of-the-money weekly puts and calls over the next few weeks until the initial trade turns into a net gain.
When using the Diagonal Condor Earnings Strategy, one of the things we like to find is a stock about to announce earnings where the options have priced in a post-announcement price fluctuation which is greater than the historical average of the post-announcement changes for that company.
Our goal is to create two diagonal spreads at a credit (or slight debit) which allow for a profit to be made if the post-announcement fluctuation is within the historical average amount. In the past few weeks, we have placed spreads that met these criteria on several companies, including Carmax (KMX), TD Ameritrade (AMTD), and Red Hat (RHT), and these plays were all profitable, with returns from 30% to over 70% including commissions in a single week.
This week, we are looking forward to taking a position in Mastercard (MA) which announces earnings before the market opens on May 2. The 4May18 options have priced a 3.8% post-announcement price change while the average change for the last eight quarters has been only 1.1% (about $2 when the stock is trading about $175).
Here are the trades we made this week using the Diagonal Condor Earnings Strategy that is outlined here in case you missed it earlier. Here are the spreads we will place just prior to May 2 (prices as they exist now):
Buy To Open MA 1Jun18 170 puts (MA180601P170)
Sell To Open MA 4May18 175 puts (MA180504P175) for a credit of $.25 (buying a diagonal)
Buy To Open MA 1Jun18 182.5 calls (MA180601C182.5)
Sell To Open MA 4May18 177.5 calls (MA180504C177.5) for a credit of $.17 (buying a diagonal)
After paying a commission of $2.50 per spread at the commission rate charged to Terry’s Tips subscribers at thinkorswim, each pair of spreads will incur a maintenance requirement of $500 less the $42 plus the $5 commission, making it an investment of $463 (the maximum theoretical loss). One of the spreads is guaranteed to make a gain no matter what the stock might do after the announcement.
Here is the risk profile graph for the above spreads, assuming that implied volatility (IV) of the 1Jun18 option series will fall by 3, from 28 to 25 after the announcement. This compares to the current IV of the 4May18 series which carries an IV of 35.
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