JPMorgan Chase is showing elevated implied volatility, with an IV rank of 56%.
That means that the current level of implied volatility is higher than 56% 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 Friday, and we typically see elevated implied volatility around that event.
JPMorgan stock has stayed within the expected range following four of the last six earnings announcements.
For this earning report, JPM stock is anticipated to stay in a 4.2% range, up or down.
Traders who think JPMorgan 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 April 14 expiry, we could sell the 122 put and buy the 117 put. That spread could be sold for around $0.55 late Thursday.
Then the bear call spread, which could be placed by selling the 133 call and buying the 138 call. This spread could also be sold for around $0.55.
In total, the iron condor will generate around $1.10 per contract, or $110 of premium.
The profit zone ranges between 120.90 and 134.10. 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 5-1.10 x 100 = $390.
Therefore, if we take the premium ($110) divided by the maximum risk ($390), this iron condor trade has the potential to return 28.21%.
If price action stabilizes, then iron condors will work well. However, if JPMorgan stock makes a bigger-than-expected move, the trade will suffer losses.
Option Trade Can Be Hit Or Miss
Trades held over earnings allow little room for adjusting, so they can be a bit hit or miss. Although as we know, past performance doesn't guarantee future performance.
According to the IBD Stock Checkup, JPM stock is ranked No. 2 in its group and has a Composite Rating of 87, an EPS Rating of 88 and a Relative Strength Rating of 67.
A bullish calendar spread on Shopify discussed March 30 should be closed for a small loss after the stock put in a bearish candle last week and crossed back below the 50-day moving average.
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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
