Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
What are my options - JP Morgan Earnings
Koen Hoorelbeke
Investment and Options Strategist
Summary: This article presents an educational example of using an Iron Condor strategy to capitalize on potential "volatility crush" during the earnings season, using JP Morgan's forthcoming earnings release as a case study.
In last week's equity update, Peter Garnry talked about the upcoming earnings season, which is traditionally started by some of the big banks; JP Morgan, Citigroup and Wells Fargo.
Below, we present an example of a potential earnings trade. This strategy seeks to capitalize on a common market phenomenon observed during earnings season: the volatility crush. Typically, as the date of an earnings announcement approaches, market uncertainty escalates, driving up implied volatility and, consequently, option prices. Once the earnings are released and the uncertainty dissipates, implied volatility tends to drop, leading to cheaper option prices.
One common approach to profiting from this "volatility crush" is to sell an iron condor just prior to the earnings release, when option prices are still elevated. An iron condor is a defined risk strategy that involves selling a call spread and a put spread on the same underlying asset with the same expiration date. The maximum risk involved is limited to the width of the spread (the difference between the strike prices of the sold and bought options), minus the net premium received when initiating the position.
Please note that the strategies and examples provided in this article are intended for educational purposes only. They are designed to aid in the development of a thought process and should not be blindly copied or implemented. Every investor or trader must conduct their own due diligence and consider their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market involves risk, and it's crucial to make informed decisions.
Trade JPM ($145.15) Iron Condor expiring 21 July 2023
Reason | High Implied Volatility (IV) due to numbers out on 14th July before market close |
Expectation | Limited movement in JP Morgan shares after releasing the figures and imploding IV |
BEPs on expiry | Profit between $139.75 and $153.75 |
Max Risk | If you get a premium of $1.45 the max risk/loss would be $5 - $1.45 = $3.55 per share. 1 contract = 100 shares. Max Risk/Loss = $3.55 * 100 = $355. |
Which clients | Only for clients to adhere to the view that the numbers will not cause a big move in the share price of JP Morgan |
Trade set up | Sell the Iron Condor in the last 1 – 4 hours of trading on Thursday 13rd for around $ 1,45 - $1,50 (stagger in case of bigger positions) |
Closing | A GTC (Good Till Cancelled) order to close the position at $0,30 (stagger in case of bigger positions) |
Emergency | If there is a big move in the underlying outside the bandwidth of the long strikes, monitor closely and close position latest on the 21th of July 2- 4 hours before expiry |
Probability of Profit | 62.85% |
Expected Move | for 14th July ’23, based on ATM straddle: +/- $4.37 |
IV Rank | 12.88% |
Some remarks:
Notably, the Implied Volatility (IV) Rank is currently at 12.88%, which is relatively low. It's essential to keep a close watch on any changes in price. The run-up to earnings releases can sometimes trigger dramatic shifts in implied volatility. However, this is not a guarantee. The market may not anticipate significant price movement, resulting in a persistently low IV. If JPM's price remains stable, the strategy could still yield positive results, even without a substantial volatility drop.
In the pre-market, the price has begun to trend upwards, potentially indicating market anticipation of positive earnings results. However, this is merely an indication and not a definitive prediction.
In the above trade setup, the expiry date is set for one week following the earnings release. This provides a buffer, or "wiggle room," for price fluctuations that exceed the range of the iron condor, allowing time for the price to potentially realign within the range.
If it becomes apparent that the price will not return within the iron condor's range, it's advisable to exit the position promptly. As the position will still retain some extrinsic (time) value, it might be possible to close it at a cost less than the maximum loss.
This trade setup serves as a valuable learning tool for understanding the impact of volatility on option prices. Even if you choose not to execute the trade, you can still set it up and monitor its performance before and after the earnings release. This can provide insightful observations for future trading strategies.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...