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In my article last week on Research In Motion's (RIMM) earnings, I recommended using a 'reverse iron condor' spread to profit on a modest move in either direction. In fact, the trade could have been sold before Research In Motion even reported earnings after the market closed on Thursday. The trade was a huge success, returning a 70% ROI. I closed the position on Friday morning.

The 'reverse iron condor' spread is a neutral options strategy that is placed with a net debit instead of a net credit to the buyer, and can be placed with a lower level trading account. Most brokers will let you place this trade if you are approved with a Level 2 or Level 3. Please check with your broker, and if not approved, you can also request to be upgraded.

This trade is a limited risk, limited profit strategy. Yet, there is a very healthy return awaiting if the stock should make even a modest move after reporting earnings.

Here is how the 'reverse iron condor' trade is placed accurately using only one contract each for explanation purposes:

Reverse Iron Condor Construction

  • Buy 1 OTM Put
  • Sell 1 OTM Put (Lower Strike)
  • Buy 1 OTM Call
  • Sell 1 OTM Call (Higher Strike)

Oracle Corporation (ORCL) is scheduled to report earnings on Tuesday, December 20, 2011, after the market closes. The stock is currently trading at $29.74/share. The 52-week range is $24.72 - $36.50.

52wk high: 36.50
52wk low: 24.72
EPS: 1.77
PE: 16.40
Div Rate: 0.24
Yield: 0.826731
Market Cap: 150.73 B
Volume: 15.61 M

Here is how I will be placing the trade. The 'reverse iron condor' has four legs. (Note: you can increase or decrease the number of contracts to suit your preferred investment in the trade):

  • Buy (20) ORCL December Week 4 $29.00 put options
  • Sell (20) ORCL December Week 4 $28.00 put options
  • Buy (20) ORCL December Week 4 $30.00 call options
  • Sell (20) ORCL December Week 4 $31.00 call options.

The current bid/ask spread for this trade is $0.57 -$0.68. You should be able to place a limit order of $0.64 and get your order filled.

Requirements

Cost/Proceeds $1,300.00
Option Requirement $0.00
Total Requirements $1,300.00
Estimated Commission $100.00

Here is the profit/loss chart for this trade.

Current Price: $29.74

Price Profit / Loss
21.00 $700.00
24.41 $700.00
27.99 $700.00
28.00 $700.00
28.35 $0.00
29.00 ($1,300.00)
30.00 ($1,300.00)
30.65 $0.00
31.00 $700.00
31.58 $700.00
38.75 $700.00

Since this trade is placed with a net debit instead of a net credit, the maximum risk is $1,300.00. This is the most you can lose on the trade. The highest amount of profit you can make is $700.00 (or 53.8% ROI) when using 20 contracts on each "leg."

The break-even points for this trade are $28.35 and $30.65. From Oracle's current price of $29.90/share, the stock will only have to move 6.3% to the downside or 4.2% to the upside to gain the maximum potential profit. With Oracle reporting earnings on Tuesday, I feel this is easily attainable.

When using the 'reverse iron condor,' you always want to make sure to close the position before expiration.

Source: Trading Oracle Earnings Next Week