JPMorgan Chase is showing elevated implied volatility, with an IV percentile reading of 79%.
That means that the current level of implied volatility is higher than 79% of all other readings in the past 12 months.
In part, that is because the company is due to report earnings before the opening bell on Thursday, and we typically see elevated implied volatility around that event.
JPMorgan stock has stayed within the expected range following five of the last six earnings announcements.
Traders who think JPM stock 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.
Trade Profits From Time Decay
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 July 15 expiry, we could sell the 110 put and buy the 105 put. That spread could be sold on Friday for around $0.62.
Then the bear call spread could be placed by selling the 118 call and buying the 123 call. This spread could be sold on Friday for around $0.70.
In total, the iron condor will generate around $1.32 per contract, or $132 of premium.
The profit zone ranges between 108.68 and 119.32. 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 5-1.32 x 100 = $368.
Therefore, if we take the premium ($132) divided by the maximum risk ($368), this iron condor trade has the potential to return 35.87%.
Risk Grows If Stock Makes A Big Move
If price action stabilizes, then iron condors will work well. However, if JPM 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. JPMorgan stock has stayed within the expected range following all six of the most recent earnings releases. But as we know, past performance doesn't guarantee future performance.
According to the IBD Stock Checkup, JPMorgan stock is ranked No. 12 in its industry group and has a Composite Rating of 31, an EPS Rating of 64 and a Relative Strength Rating of 29.
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
