Earnings season kicks off next week with a few big name companies reporting results. One such company is UnitedHealth, which reports earnings on Oct. 13 before the opening bell.
UnitedHealth stock has stayed within the expected price range following three of the last six earnings announcements.
UNH stock is now expected to stay in a 3.9% range up or down after the next report, which is higher than previous earnings releases.
Traders who think UnitedHealth stock will not move too much following this earnings report, could look at an iron condor trade.
Setting Up Trade Ahead Of Earnings
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 the Oct. 13 expiry, we could sell the 485 put and buy the 480 put. That spread could be sold for around $0.65.
Then the bear call spread could be placed by selling the 535 call and buying the 540 call. This spread could be sold for around $0.70.
In total, the iron condor will generate around $1.35 per contract, or $135 of premium.
UNH Stock Trade Profit Range
The profit zone ranges between 483.65 and 536.35. 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 5-1.35 x 100 = $365.
Therefore, if we take the premium ($135) divided by the maximum risk ($365), this iron condor trade has the potential to return 37%.
If UNH stock stays within the expected range, then the iron condor trade will work well. However, if UnitedHealth stock makes a bigger-than-expected move, the trade will suffer losses.
According to the IBD Stock Checkup, UNH stock is ranked No. 1 in its industry group and has a Composite Rating of 93, an EPS Rating of 92 and a Relative Strength Rating of 72.
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
