Micron Technology reports earnings on Tuesday after the closing bell. Today, we're looking at an earnings iron condor.
Micron Technology stock has stayed within the expected range following five of the last six earnings announcements.
For this earning report, MU stock is anticipated to stay in a 7.1% range, up or down.
Traders who think MU stock will not move too much following this earnings report could look at an iron condor trade.
Trade Set Up 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 March 31 expiry, we could sell the 57 put and buy the 52 put. That spread could be sold on Friday for around $0.55.
Then the bear call spread, which could be placed by selling the 66 call and buying the 71 call. This spread could be sold on Friday for around $0.45.
In total, the iron condor will generate around $1 per contract, or $100 of premium.
The profit zone ranges between 56 and 67. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Maximum Risk $400 On Trade
Because both spreads are $5 wide, the maximum risk in the trade is 5-1 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%.
If MU stock stays within the expected range, then the iron condor trade will work well. However, if Micron makes a bigger-than-expected move, the trade will suffer losses.
According to the IBD Stock Checkup, MU stock is ranked No. 3 in its group and has a Composite Rating of 47, an EPS Rating of 12 and a Relative Strength Rating of 85.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for educational purposes only and is 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
