UnitedHealth reports earnings on Jan. 13 before the opening bell. We looked at a successful iron condor trade for the company's last earnings release and today I thought we'd do the same.
UnitedHealth stock has stayed within the expected range following four of the last six earnings announcements. UNH stock is expected to stay in a 4.1% range, up or down.
Traders who think UNH 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.
Option 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 Jan. 13 expiry, we could sell the 505 put and buy the 500 put. That spread could be sold on Friday for around $1.10.
Then we set up the bear call spread, which could be placed by selling the 555 call and buying the 560 call. This spread could be sold on Friday for around $0.60.
In total, the iron condor will generate around $1.70 per contract, or $170 of premium.
The profit zone ranges between 503.30 and 556.70. This can be calculated by taking the short strikes and adding or subtracting the premium received.
UNH Stock Trade Has Potential Return Of 51%
Because both spreads are $5 wide, the maximum risk in the trade is 5-1.70 x 100 = $330.
Therefore, if we take the premium ($170) divided by the maximum risk ($330), this iron condor trade has the potential to return 51.52%.
If UNH stock stays within the expected range, then the iron condor trade will work well. However, if the stock makes a bigger-than-expected move, the trade will suffer losses.
According to the IBD Stock Checkup, UnitedHealth stock is ranked No. 2 in its industry group and has a Composite Rating of 85, an EPS Rating of 94 and a Relative Strength Rating of 79.
The bearish calendar on Google stock has performed well and can be closed for a nice profit.
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
