Iron Condor and Double Calendar on Earnings | Swing Trading (Days to Weeks)
good day everyone john mcnichol here and welcome to swing trading days to weeks so do we have another turnaround tuesday uh remember we are in the midst of earnings so we'll see how things shake out so stick around [Music] all right it's great to see everyone here today uh live as well as listening to the archive session uh live we got vj frank sandeep lamar robert wayne larry juanita george texas anthony and everyone else sorry if i missed anyone and once again those who listen to the archive session join us each and every week do appreciate the support hey we're joined by james boyd on the chat james helping out any questions i am unable to get to he's more than happy to help it's great to have him back you can follow us both on twitter it's a great way to learn about your instructors as well as more about the markets i'm at j mcnichol underscore tda you'll see that at the bottom of the screen and lower right throughout the presentation james can be seen at jboid underscore tda let's go ahead and get into our disclosures and we'll get right into it folks the contents intended for educational information purposes only non-investment advice or recommendation of any security strategy or account type options not suitable for all investors please look at the previous divided copy of characteristics and risk of standardized options spread straddles other multileg options strategies topic we'll be talking about here today can entail substantial transaction costs they may also involve greater more complex risk than single leg option trades also because they're short-lived instruments weekly options positions require close monitoring as they can be subject to significant volatility profits can disappear quickly and can even turn into losses with a very small movement of the underlying asset likewise uh you're encouraged to practice what you'll learn here today with tools such as paper money paper money application is for educational purposes only likewise a long call or long put option the entire option is at risk as well as short options assignment can occur at any time regardless of the in the money amount as we talked about transaction costs and while this webcast may discuss technical analysis other approaches including fundamental analysis may assert very different views in order to demonstrate the function out of the platform we will be using actual symbols however td ameritrade does not make recommendations or terms suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility there's a brief bio for those of you that are interested i along with james have been around the investing community for quite some time as well as on the educational side we're both very passionate in what we do and hopefully you enjoy our presentation here today as well let's go ahead and talk about our agenda since we are in the midst of earning season as uh we know that prices can move one way or the other uh we'll take a quick look at some of the current market conditions and then we'll explore some fundamental elements of trading around earnings there's several different strategies that some traders may employ the two that we'll take a look at here today with our example on a place in an iron condor trade uh as well as demonstrating how to place what's referred to as a double calendar these are both advanced option strategies that are taught in our advanced options course we also have a workshop that covers down on some of these strategies as well i believe that workshop's going to be in two weeks from now if you're very basic on options we do have an options workshop next week that yours truly uh will be teaching and uh and then that'll be followed up by an advanced options workshop the next week so make sure you keep an eye on that schedule that's accessible on the education tab via the live events all right let's go ahead without further ado and we'll get into the market here and yes uh thanks uh mr wiley there uh i i do uh like to cook and kind of explore that uh those spaces you'll see some of those pictures on my twitter feed as well all right looking at the s p 500 now just from a broader perspective uh you know from a bullish perspective you know bulls are speculating that you know we may be in the midst of a inverse head and shoulders a pattern that we've been talking about for some time uh there has been more of the base that has been forming at least over the last five six sessions here on the s p today's price action uh very strong up about 1.3 percent on the s p but as we do look close to this uh we've also seen you know relatively wider ranges in the market over the last five or six sessions here and uh today being no different although a more of a bullish candle this price is trading above the high the low day but still uh kind of pushing up on resistance still below the 55 day moving average in this example what some traders may be looking for is for some follow through see if we're able to break out of this weekly range and speaking of weeklies you know one can see how that's developing by switching time frames uh bringing up a weekly time frame w there and kind of seeing how that week is progressing and as it's setting up right now for the week if we hold in this range or higher more along the lines of a pearson line as that price action is piercing more than halfway into the range of that previous week and vijay thanks for the vote of confidence there we'll talk more about that uh so that's what we got going on with the s p probably to see a similar price action across the board as far as the nasdaq which has taken more of a beating than some of the other markets again trying to hold some of these higher lows here and you can still see kind of that range a bit of back and forth over the last week and a half still below in this case the 55 day moving average i have on there some traders may be looking at a 50 day let's bring up the dow djx dow is doing better here as well similar to what we saw with the s p kind of that transition to potentially those higher lows and looking for a close that may be trading or closing in a higher range that we haven't seen for the last two weeks some traders may go ahead and look at some drivers of that uh maybe tied to earnings if we go to the market watch tab go to visualize this is where we can see how some of those dow components are doing once we're on visualize we can come over here under indices look for the dow jones and we can see stocks such as apple up almost a percent uh microsoft uh trying to show some recovery after selling off uh 1.3 percent johnson johnson up three percent so you can see uh most of the components up uh with a few exceptions in fact very few exceptions uh travelers being the only one down there and energy uh being down kind of an interesting note uh before we move on uh looking at things such as uh energy energy stocks uh are the only losers on the day as far as with sectors as areas such as crude prices natural gas even heating oil which is tied more to diesel hasn't pulled back as much as some of us diesel uh consumers would like there's still a skew between gasoline and diesel there uh but we've seen some of the pressure uh come out at least for the day on some of those uh commodities there and that may have created a bit of a shift we'll see if that continues when one looks at which sector is the out performer today consumer discretionary with the consumers potentially putting less money in the tank versus and putting it somewhere else a lot of gaming stocks hospitality airlines across the board still looking for that big reopening trade there and so big move and pretty close from a relative strength standpoint uh to outperform in the s p kind of a three month view based off of a lot of work i've done with relative strength is you know looking for that out performance so kind of on the precipice there on uh if we're gonna see that rotation or not all right and finally with the vix volatility which is going to be part of our topic here uh volatility uh has uh backed off over the last two sessions still above 20. but kind of in the lower half of what we've been seeing uh year to date there and that's kind of uh given a little uh support for some of those bulls there as well all right okay let's go ahead and take a look let's talk about trading around uh some of these earnings events and you know as with uh trading around earnings there's usually some expectations uh one is that price has a tendency of moving uh whether up or down sometimes it may be moving strongly up strongly down or somewhere in between uh two we know or typically when it comes to volatility volatility has a tendency of rising into that earnings event and likewise has a tendency to drop off after that earnings okay now if prices do continue to sell off that can also elevate volatility although usually when one looks at individual stocks have a tendency of seeing these spikes in volatility going into that earnings event and so some traders look to potentially take advantage of these types of events and there's various strategies that one can apply uh to do that one is uh an iron condor which is an option selling strategy and as many of you may already know when one sells options usually that's an expectation to benefit from the passage of time may benefit from some price movement and likewise would benefit if volatility drops and that isn't a potential expectation after earnings now there's another strategy called a calendar other traders may look at diagonals are actually an example of a long option spread which also potentially looks to benefit possibly with some price movement uh as well as benefit from volatility on the long-sided benefits of volatility rises however in the context of earnings we have a short component to that option that is relatively expensive compared to the longer dated option and likewise look to benefit from that short-term potential short-term drop in volatility so we'll go ahead and explore both of these actually with one stock example that does have earnings coming out actually after the market today and then we'll go ahead and actually follow up with both of these examples next week and would encourage you to practice uh whether similar trades on paper money so you can experience for yourself the impact the price time and volatility and possibly tie in some of the probabilities that may be tied into these examples now keep in mind probable is not certainty all right so let's go ahead and for example we're going to take a look at netflix nflx again we'll bring that up now we look at netflix uh netflix has been on the downslide for some time as an example uh from a a longer term standpoint let me see if i can bring this up from a longer term standpoint this stock has kind of pushed out of what had previously been an upward channel now longer term the stock is uh is is up over time but we can see kind of a break below that channel and so a lot of selling pressure as the stock is down quite a bit uh year to day it was trading as high as uh 700 in october uh basically lost about 50 of its value now some traders may be looking at this from a bullish perspective as far as an investor and looking from a matter of value if they believe that that support may hold may look to be bullish over time now they may or may not wish to speculate during an earnings event but see maybe what the follow through is if the price actually breaks out of that small basing pattern which has occurred over the last month or so okay so and we're seeing a bit of a hold there as well now with earnings coming up we don't know necessarily if things are going to be good or bad and if the price is going to go up if it's going to go down or maybe it may stay in a range well with the examples we're going to look at today we're going to have uh an example where we may expect the stock to stay in a certain range all right and we can look at a few things and say well why would one consider you know selling some premium going into that event well notice at the bottom of the chart we have implied volatility shown on the chart that can be added by going your studies edit studies and look for implied volatility you just start typing in inp and you can double click to add that now since we already have that added here i'll remove that click ok as we look at this chart over the uh last year or so we can see implied volatility for netflix options is at its highest point over the last year that means that options are relatively expensive now than where they were earlier this month beginning of the year even going back to back in the fall and last summer now there's no guarantee that the volatility would uh drop significantly uh each and every time but notice from the historical perspective as we look at things such as earnings as we highlight each of these events notice that there had been a tendency for that volatility to drop okay now that's not a guarantee that again it'll occur this time but going off those assumptions one may look to benefit from that drop in volatility and if we're looking for a benefit of a drop in volatility and expect the price to possibly stay within a wide range that could be potentially a candidate for something such as an iron condor so those of you that may have looked at this strategy in the past it's really simply nothing more than some strategies we've actually done in this class and into breakdown reversals basically two vertical spreads we're going to go ahead and sell a call vertical which is going to be potentially above resistance and generate a credit we're also going to sell a put spread which may be below support that'll also generate a credit so we have one bearish spread matched up with a a one bearish spread matched up with one bullish spread and they will actually kind of create more of a neutral strategy where we expect the price to stay within that range kind of between the goal posts so let's see if we can go ahead and construct that as an example and we'll see how that ties in with these price ranges that we've identified as far as resistance as well as support so i'm gonna go to the trade tab now remember i talked about the disclosures at the beginning here uh there are options that expire in three days now you know the pro of shorter term options is if if one's right in that short period of time they can capture that decay as well as a potential rapid drop in volatility the con is if the price moves strongly one way or the other there may not be enough time for the price to trade back in that range uh so there's some pros and cons to that all right now another view here and this is going to tie not just with this strategy but the other strategy is notice how high the implied volatility is on the shorter dated options whereas as we go further out in time let's say 60 to 80 some days out that volatility is significantly less and the idea here is post earnings the volatility will have a tendency of dropping significantly not necessarily down to this level but kind of a bit more of a normalization there all right so let's go ahead and construct an iron condor and we'll do it basically with two short verticals uh we'll go ahead and we'll take a look at the call side here and uh when i was doing this previously i don't think anything's fundamentally changed let's see here looking at selling the 392.50
and i think the price did move a little bit there so we may go ahead and look at the 387 here i'm going to go ahead and look at somewhere near around a a 20 delta and let's say here we'll go ahead and right click i'm going to go ahead and do cell vertical okay cell vertical and what we did is we basically are selling uh that 390 strike and by default it goes to the very next strike now i think when i was looking at this i had an example of a a five dollar wide now we may adjust that a little bit so let me make sure i got that yeah i had a five dollar wide so 390 and we'll go five dollars above that that'll be at the 400 strike now notice here that's a dollar and 55 cent credit for selling that call spread now if one was just bearish and they expect the price to stay below 390. one can stop right there that's basically 40 dollars above where the stock is right now and based off the market maker move the expected move based off options pricing is about 35.46 now that's an expectation prices can blow right through that range uh whether up or down but that's kind of the current expectation based off of the the implied volatility going into earnings okay now if we go ahead and we take a look uh on the chart and we look at where the resistance is notice uh around that uh 395 if that's what i selected nope oh that's actually ten dollar wide my mistake here uh i'm gonna go ahead and adjust this to a 395 since i think that's what i was looking at earlier and the 400. now this credit is not as great but it does put us at or above this resistance area okay let's go and look at the put side we're going to go to trade tab and then we're going to come over here and let's look at somewhere in those 20 deltas as well here and we got around the 315 uh to the 317 range here let's start off with the 315 i'm going to hold on the control key this is going to enable us to match it up with the other option we were looking at i'm holding the control key we're going to right click and we're going to go ahead and do cell vertical and that went ahead and basically put in a put spread on top of the call spread and notice it automatically defines it as an iron condor now i'm going to do is i'm going to make this a similar width a five dollar wide we got 315 we got three 1250 so i'm going to go ahead and make this a 310. and you can see now here's our credit with those combined spreads now if i go ahead and do a confirm and send we can learn a little bit about what our profit would be our maximum profit would be 165 that's assuming that price stays in between the short strikes which in this case is in between 395 and 315 okay now there's also break evens based off of that credit as well to both the upside as well as the downside uh the max loss is going to be the width of that spread which is five dollar wide times the multiplier minus uh the credit received okay now we can also analyze this as well and i'm going to go back here i'm going to right click we're going to analyze the trade so bring up analyze and those of you that may have explored this strategy in the past you can see why it's called an iron condor the profit is up in this range which is the credit received uh you can see if the price goes whether strongly down or strongly up that profit will drop off and may result in a loss the max loss would be to the downside or to the upside one of these credits could easily expire worthless for a maximum gain whereas if the price moves in the other direction that option or spread would have a loss so kind of somewhere in between now if we go over here on this analyze tab next to the plus sign i'm going to click on the plus sign and set slices to break even set slices to break even and go to 423 and the probabilities are very high again keywords probable there's still a chance okay uh it's certainly not a certainty okay in this example uh showing about nine percent but 91 that probability based off of current pricing that the price may be between 313 and 396.
now if we go ahead and we take those numbers come back to this plus sign set slices to the charts we can visualize and see from a technical standpoint does that kind of line up uh with what we're looking at and notice that the one break even to the upside is right on the resistance we identified and the downside break even is actually a bit below where the current support is and notice where the current price action right now is it's not quite in the center but essentially if the price stays in this range going into earnings or after earnings and going into expiration then this spread would have a maximum gain the risk is if the price drops significantly or rises significantly outside this range that that would demonstrate more of a loss let's go ahead and position size this we'll go ahead and go to confirm and send so the maximum loss is going to be again the spread minus the credit so it's 338 dollars let's say i'm willing to risk a thousand dollars in this trade and i'll do this three times so we got three times confirm and send so there's our potential maximum gain there's our maximum loss now what we could do is potentially close this out if we realized a significant percentage of this maybe 70 to 80 percent of that so if we're able to capture about you know 375 400 then may consider closing that prior to expiration okay that is one of the uh deals here when it comes to managing the trade is remember there is a short call there is a short put those would be at risk of assignment if the price trades to those short strikes and those short strikes become in the money now we can potentially go ahead and close out those trades prior to expiration uh to reduce the risk of that assignment although keep in mind that assignment can occur at any time up until expiration now if the price stays in between the range and one has a high confidence that else both of those options will stay out of the money we may allow uh those spreads to expire worthless thus realizing that maximum gain another approach as prices particularly in this market can swing strongly back and forth is if the price moves up to the one side of the spread one may close out the profitable side and then if the other one comes back in then go ahead and close that one as well now we only got three days for this example but stranger things can happen one can potentially lay out of that trade all right let me know if you have any questions on what we've discussed thus far hopefully you're learning something new and i do need to point out there is a survey that's here we're not done yet we got one other uh trade to take a look at uh the double uh calendar trade but if you enjoy well certainly if you enjoy what you're learning here today there is a like button i would strongly encourage a like button hit the like button but we also have a survey as well for those of you that are here live if you can click on that link and fill it out towards the end of the session i would certainly appreciate that you can vote twice as well by clicking like and uh for those of you that are listening to the archive session uh simply click like and uh do appreciate that all right okay so we talked about the iron condor which again looking to benefit if the price stays within its expected range benefit from the passage of time with the time decay and with the volatility drop in that can also accelerate that depreciation now let's talk about another strategy called a calendar and we're actually going to do what's called a double calendar which is going to be an attempt to give a relatively wide range of profitability and kind of close to a maximum gain kind of similar to what we saw with the iron condor all right have two break evens as well that may be wider than the expected move of the stock and look to benefit from the depreciation of those short options however if volatility does rise on the longer options particularly if it's to the downside one may see an inflation as well towards profitability because this is actually an example of a long spread iron condor is an example of a short spread this is going to be an example of a long spread so let's go ahead and take a look at it now charles also says i saw the question come across for an iron condor do you normally use the expiration immediately following earnings now there's no necessarily rule as far as uh immediately following this example we did look at three days now could one go ahead and look at 10 days out where the benefits of 10 days out well if the price fluctuates back and forth there may be more time to benefit from both sides of that spread if price kind of moves and threatens one side and possibly may come back in however with 10 days one's waiting a bit longer for that depreciation as well um so there's pros and cons to that and again if we go back to the trade tab on that uh you can see 10 days out those implied volatilities are relatively higher as well so maybe someone may explore looking at 10 days versus the three days if they want a little more of a buffer there now again academically we're going to see how this one plays out for the three days now speaking of that time on our calendar we'll actually take a little bit further out so let's go ahead and construct that now on a case of a calendar what we're doing is we're going to instead of doing strikes that are within the same month which is called a vertical we're going to go ahead and take a look at it in different expirations which with the passage of time is what we would call a horizontal or a calendar if we do the same strike price okay so what we're going to do is we're going to select a strike price on the call side we're going to select strike price on the put side for each of these spreads now when i was looking at this previously i was looking at the 380 and the 332 area okay so why did were we looking at 332 and notice that the expirations are different 20 may for the long options and was still selling the shorter dated options with three days of expiration so let's go ahead and see if we can construct this i'm going to come here on the call side i think we're starting with the 380. now notice uh these are also kind of uh out of the money is what we're looking at here for this example so if i go ahead and right click i believe i should be able to come here and do cell calendar since we're selling that shorter dated option and actually i did that wrong should actually be by calendar let's try that again buy calendar uh what it's doing it's selling the shorter dated option and it's buying the very next expiration now i was going a little further out as far as time going out i believe to the may option let's make sure i was looking at that right 20 may so i'm going to go ahead and change this longer dated option to 20 may now notice right now that that is a debit it's a debit spread and if i was to go ahead and analyze this i'm going to right click analyze the trade now when you have multiple strategies that are in here one may want to go ahead and actually particularly if there's a position in there did i actually get that trade out uh let's see here i may have to go back and make sure you get that iron condor through uh but let's go ahead and continue on with the uh calendar here so right now if i right click and do an analyze trade here we go here i'm going to uncheck the iron condor we were looking at before in fact before i forget i'm going to right click on this let's make sure i don't have nothing working here nope from the analyze trade i'm going to right click on this do a confirm and send we're going to make this three contracts one two three confirm and send and we'll send that through it looks like we got to fill on that we'll go and manage that now as we look at the calendar here notice that it has a peak and it kind of drops off to the downside it drops off to the upside this is a another neutral strategy but the maximum gain is going to be realized if we trade to that short strike now there's a wider range of profitability but the maximum gain is kind of stuck around that 380. well what if we want to look at another example on the put side so i'm going to come back to the trade tab and if we go ahead and we take a look and also keep in mind the maximum gain being realized at that short strike so we can bring that up in the case of the call side 380 uh in netflix if you look at netflix we're currently at 349. so to be at a max gain it would have to trade up to 380. that would actually make this more of a directional trade to the upside being bullish but let's say we want to hedge and look to the downside as well we can go ahead and look at a put calendar that may be out of the money here so i'm going to go ahead and go to the back to the trade tab now i have to go ahead and construct this again because i think i deleted it i did so once again i'm going to go ahead on that 380.
bring that up to the top here again this example was out of the money i'm going to right click buy calendar and we had selected that 20 may expiration on the longer date okay i'm going to minimize this we're going to go to the put side we're going to look for another out of the money spread and i think before i was looking at this was looking at the 332 strike so let's see if we can bring that up so here's a 332 and a half notice that's around a 30 delta here i'm going to right click on this one and we're going to hold the ctrl key and i'm going to go ahead and select buy calendar for the put side and now we went ahead and married that up there let's make sure i got this right so we're basically our selling the 332 and a half for 22 april and i'm going to change the other put side to 20 may and there we go now notice here this is a debit spread what's our risk our risk is what we pay for that spread so if i'm risking about a thousand dollars that's about our risk right there now what's the benefit of doing this debit versus doing the credit that we did on the iron condor let's go ahead and edit this now i'm going to right click and do an analyze trade and now if you take a look at this spread notice it has similar characteristics of what we saw with the iron condor we have a wider range of profitability closer to that maximum or potential maximum gain if the price does go strongly up or strongly down that profitability does taper off but let's go ahead and come over here next to the plus sign i'm going to click on set slices to break even now this breakeven is going to be a moving target if volatility drops significantly on the longer dated options this can possibly collapse a little bit and our breakevens may be smaller but the idea is that the shorter options would depreciate quicker and thereby realizing a potential gain and notice that potential gain could be significant compared to what we did with the iron condor which i believe had about a 40 return on risk maybe a little bit more this one we're risking about a thousand to potentially have a gain of closer to two thousand particularly come close to that 380 strike it's a little skewed uh to the upside but there's still a significant gain if it kind of stays in that range notice the break evens are relatively wide here as well based off of current volatility if i come here next to the plus sign set slices to break even just double check that there and then go click next to that set slices to the charts notice our break even significantly higher here on the call side and then also likewise i believe on the put side uh looks like it's around 300 i think let's just double check that yeah around 300 so similar break even uh that we had i believe with the iron condor okay so a lot of it's uh speculating that the price stays above 300 in this example and then between iron condor weather stays somewhere below i believe 390 395 and then in the case of the calendar if the price does go higher there's more of a benefit for profitability here to the upside right so let's go ahead and double check so we got going on here i'm going to go ahead and send this one through and we'll go ahead and we'll manage this one as well let's do a confirm and send and we'll send that one through i'll do no says double diagonal i'm going to send that one through and i'll double check to make sure that one gets filled now as far as managing this trade we're going to basically keep or i will be keeping the high uh you can certainly follow along with it too is since both of these would be expiring going into friday uh would require active management as early as tomorrow post earnings and continue possibly managing it going into friday's expiration to limit the risk of assignment uh as well as managing hopefully what may be a profitable trade if we fall within that range so coming back to that if we go to the analyze tab the idea here is some of the better outcomes is that the price stays more in that 330 to 380 range to try and capture most of that close to that maximum gain if we go a little further out one side or the other we may look to close it out for a limited gain and certainly if it blows out one side or the other may look to close it out for a a little more of a limited defined loss okay let's go ahead and double check see if anyone has any questions or hopefully you learned something new now if you are very new to options i'm sure this was probably a little more advanced some resources that you may want to consider if you haven't already been taking advantage of them is uh taking there's a ding so it looks like we got a practice fill there is taking a look at the education tab on the td ameritrade website if we go ahead and bring that up there i am on twitter if you wish to follow likewise folks as i'm going through this make sure you consider filling out the survey there we'll have james push that out again thank you james but coming up here to education once on education go to options you can also do the same thing through the thinkorswim platform go to the education tab and then select options once there you'll see a whole series of videos but we'll scroll down under options content and look for courses we have three courses if you're very new to options and want to learn about some of the building blocks of some of these advanced options strategies such as short verticals which are part of that iron condor take a look at trading options for more of a deeper discussion on volatility is the options for volatility course which is here okay and uh both of these are very informative you want to learn about weekly options they're there as well when you drill into that you'll see some of the different strategies that we've talked about particularly in the advanced one there's iron condors under time spreads there's long calendars okay [Music] also there are some sample investing plans that one may see in some of these courses as well then if you go ahead uh back up to education and select events believe right now we're in the midst of a technical analysis workshop with mr ray kimbrell and mr scott durfee you can still join in on that these are live only but next week yours truly will be doing option strategies virtual workshop and then the following week ben watson will be covering down on advanced adoption strategies yet between myself ben and james you'll see us covering down and switching up uh with these different workshops it's a great way to learn about these strategies as well as from different instructors strongly encourage you to go ahead and attend those all right let's see if we covered down on everything we said we were going to folks hopefully you agree we went and reviewed some of the current market conditions we explored some of the fun fundamental elements of trading around earnings with this focus being on volatility and potential drops in volatility after earnings now keep in mind price still has a vote hence we look for wider ranges where price can go up or down as long as it stays in that range and based off of volatility potentially look at some higher probability potentially profitable examples now again there's no guarantee probable is not certainty and those that follow it in the past on some of these spreads you can see the losing side of that as well so encourage practice what you learn here today folks and remember in order to demonstrate the functionality of the platform we did have to use actual symbols keeping in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility have a great day folks looking forward to talking with you again real soon bye now [Music] you