It's a big week for company earnings, and Procter & Gamble is due to report on Wednesday before the opening bell. PG stock rose Monday afternoon.
PG stock is currently showing an implied volatility percentile of 97%, which means options are very expensive compared with the recent past. That could mean it's a good time to be a seller of options on Procter & Gamble. One popular strategy for earnings is to sell an iron condor.
Last week, we looked at an example on UnitedHealth, and the iron condor expired worthless on Friday afternoon for a full gain of 45%. For P&G earnings, the options market is pricing in a move of 4.6% in either direction.
PG Stock Has Traded As Expected
Procter & Gamble stock has stayed within the expected range following three of the last six earnings announcements. Traders who think PG stock again will not move too much following this earnings report could look at an iron condor trade.
Let's look at an example of how we might set up an iron condor over earnings. 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 this coming Friday's expiry, we could sell the 120 put and buy the 115 put. That spread could be sold last Friday for around $0.90. Then comes the bear call spread, which could be placed by selling the 130 call and buying the 135 call.
This spread could be sold on Friday for around $0.60. In total, the iron condor will generate around $1.50 per contract, or $150 of premium. The profit zone ranges between 118.50 and 131.50. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is 5-1.50 x 100 = $350. Therefore, if we take the premium ($150) divided by the maximum risk ($350), this iron condor trade has the potential to return 43%.
If PG stock stays within the expected range, then the iron condor trade will work well. However, if the stock makes a bigger than expected move, the trade will suffer losses.
Short Time Frame Due To Earnings
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 the IBD Stock Checkup, PG stock is ranked No. 5 in its group and has a Composite Rating of 62, an EPS Rating of 81 and a Relative Strength Rating of 46.
An earlier calendar spread on Goldman Sachs is sitting on profits of $185 and can be closed.
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.
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.
