Roku (ROKU) is due to report earnings after the market close on Thursday. The Barchart Technical Opinion rating is a 100% Buy with a strengthening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
ROKU rates as a Strong Buy according to 11 analysts with 1 Moderate Buy rating, 10 Hold ratings, 1 Moderate Sell rating and 3 Strong Sell ratings. Implied volatility is 75.69% which gives ROKU an IV Percentile of 55% and an IV Rank of 38.41%.
Roku is the leading TV streaming platform provider in the United States based on hours streamed.
The company reported over 60 million active accounts attributed to the sale of stand-alone streaming devices, partnerships with TV brand partners like TCL, JVC, Sharp and other leading TV-makers who license the Roku OS to manufacture and sell Roku TV models, and licensing of Roku OS to certain service operators.
Moreover, Roku is benefiting from growth in advertising driven by monetized video ad impressions on the increasing popularity of The Roku Channel.
Important factors contributing to this growth include the continued growing interest in streaming by traditional TV advertisers, as well as ongoing investment in the company's OneView ad platform and overall ad tech capabilities.
Today, we’re going to look at an iron condor trade placed over earnings. These types of trades can be high risk, so make sure you understand how they work before attempting something like this.
An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
ROKU IRON CONDOR
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 July 28th expiry, we could sell the 63 put and buy the 58 put. That spread could be sold yesterday for around $0.65.
Then the bear call spread, which could be placed by selling the 85 call and buying the 90 call. This spread could be sold yesterday for around $0.40.
In total, the iron condor will generate around $1.05 per contract or $105 of premium.
The profit zone ranges between 61.95 and 86.05. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.05 x 100 = $395.
Therefore, if we take the premium ($105) divided by the maximum risk ($395), this iron condor trade has the potential to return 27%.
If price action stabilizes, then iron condors will work well. However, if ROKU 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. ROKU has stayed within the expected range following four of the six most recent earnings releases. Although as we know, past performance doesn’t guarantee future performance.
Conclusion And Risk Management
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short-term trades also have assignment risk, so traders need to be aware of that possibility. This type of trade may not be suitable for beginners.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
