This Iron Condor Is Looking At A 45% Return

Today, we’re looking at another earnings iron condor, this time on Nike (NKE). The options market is currently showing an implied volatility percentile of 86% for Nike stock ahead of its earnings report on Dec. 20 after the close. This means options are very expensive compared to the recent past. That makes option selling more advantageous.

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Earnings Expectations For Nike Stock

For NKE earnings, the options market is pricing in an expected earnings move of 9.3% in either direction.

Nike stock has stayed within the expected range following four of the last six earnings announcements.

Traders that think Nike stock will not move too much following this earnings report, could look at an iron condor trade.

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.

Let’s look at an example of how we might set up an iron condor over earnings.

Iron Condor Trade: Setting Up The Spreads

First, we take the bull put spread. Using the Dec. 23 expiry, we could sell the 99 put for Nike stock and buy the 94 put. That spread sold yesterday for around 70 cents per share.

Then set up the bear call spread. Place it by selling the 120 call and buying the 125 call on Nike stock with the same expiration. This spread traded around 85 cents yesterday.

In total, the iron condor generates around $1.55, good for $155 of premium on a block of 100 shares.

Risk Vs. Reward

The profit zone ranges between 97.45 and 121.55. 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 — 1.55 x 100 = $345.

Therefore, if we take the premium ($155) divided by the maximum risk ($345), this iron condor trade has the potential to return 45%.

If Nike stock stays within the expected range, then the iron condor trade will work well. However, if NKE stock makes a bigger than expected move, the trade will suffer losses.

With the options expiring on Friday afternoon, there is little chance for adjusting after the earnings announcement. As such the trade could be exposed to assignment risk.

According to IBD Stock Checkup, Nike stock ranks No. 7 in its industry group. NKE stock also sports a Composite Rating of 62, an EPS Rating of 58 and a Relative Strength Rating of 37.

Please remember that options are risky, and investors can lose 100% of their investment.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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