Foot Locker is due to report earnings on Friday. As you would expect in the current market, implied volatility for the stock is going through the roof.
That means options are expensive, and so it's a great time to be an option seller. Traders thinking Foot Locker will not move too much following the earnings report could look at an iron condor trade. Let's look at an example using Foot Locker stock.
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's price will not move too much in either direction.
Put another way, you make an iron condor trade in options when you think future price swings in the underlying stock will narrow.
What Is An Iron Condor? Setting Up The Trade In Foot Locker Stock
First, we take the bull put spread. Using the Feb. 25 expiry, we could sell the 38 put and buy the 35 put. That spread could have been sold Tuesday for around $0.50.
Then the bear call spread, which could be placed by selling the 45 call and buying the 48 call. This spread could have also been sold Tuesday for around $0.50.
In total, the iron condor in Foot Locker stock will generate around $1.00 per contract, or $100 of premium for a block of 100 shares.
The profit zone ranges between 37 and 46. This can be calculated by taking the short strikes and adding or subtracting the premium received.
As both spreads are $3 wide, the maximum risk in the trade is 3 – 1.00 x 100 = $200.
Therefore, if we take the premium ($100) divided by the maximum risk ($200), this iron condor trade has the potential to return 50%.
Risk Vs. Reward
If price action stabilizes, then iron condors will work well. However, if FL 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. FL has stayed within the expected range following four out of the past five earnings releases. Although as we know, past performance doesn't guarantee future performance.
FL stock is ranked number 18 in its group and has a Composite Rating of 39, an EPS Rating of 79 and a Relative Strength Rating of 22.
Past iron condor stories in this column on Walt Disney and Nvidia expired with a full profit, but there is no guarantee this trade in Foot Locker stock will also work.
Please remember that options are risky, and investors can lose 100% of their investment.
