After recent successful earnings iron condors, we can look at a similar idea with Starbucks stock. Starbucks is due to report on Thursday after the closing bell, and the iron condor takes advantage of higher implied volatility right now, since you will be selling for a credit.
Iron Condor Setup
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread. When you sell an iron condor, you receive premium as a credit to your account. If the options expire worthless, you keep the credit.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
Starbucks stock is currently showing an implied volatility percentile of 86%. That means options are very expensive compared with the recent past. Being a seller of options helps take advantage of the higher volatility.
For Starbucks earnings, the options market is pricing in a move of 5.7% in either direction. Starbucks stock stayed within its expected range following four of the last six earnings announcements.
Lately, Starbucks stock has formed a flat base with a depth of just 12% according to MarketSmith pattern recognition. According to IBD Stock Checkup, SBUX is ranked No. 29 in its group and has a Composite Rating of 51, an EPS Rating of 43 and a Relative Strength Rating of 70.
Traders that think Starbucks stock will not move too much following this earnings report could look at this iron condor trade.
Starbucks Stock Option Trade
First, let's take the bull put spread. Using the Nov. 4 expiry, we sell the 81 put and buy the 76 put. That spread sold yesterday for around $0.50.
For the bear call spread, the same expiration is used and we sell the 92 call and buy the 97 call. This spread also sold yesterday for about $0.50.
In total, the iron condor generated around $1.00 per contract or $100 of premium. The iron condor total premium is roughly at that same level today but a little different for each spread.
The calculations for the trade are pretty easy with the $1.00 premium. The profit zone ranges from 80 to 93 on Starbucks stock. You just subtract the $1 premium from the short put at 81 and add the $1 premium to the short call at 92.
Maximum profit is limited to the premium received of $100 for this Starbucks iron condor.
Since the distance of the strikes for both spreads is 5, the maximum risk just subtracts the premium from that distance. It makes the maximum risk in the trade is 5 – 1.00 x 100 = $400.
Therefore, if we take the premium ($100) divided by the maximum risk ($400), this iron condor trade has the potential to return 25% in just a few days.
Managing The Trade
If SBUX stock stays within the expected range, then the iron condor trade will work well. However, if Starbucks stock makes a bigger-than-expected move, the trade will suffer losses.
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.
The earnings iron condor on Apple discussed last week was a winner, but only just.
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
