Diagonal Condor Earnings Strategy Update #3

This is our third suggestion on how to carry out the Diagonal Condor Earnings Strategy on companies which are about to announce earnings. The first two suggestions (RHT and KMX) resulted in 40% gains in a single week when the stock fluctuated only moderately after the announcement.  One of these times, the stock is likely to fluctuate more than we would like, and we will be able to put the second part of the strategy to work.  This will involve selling out-of-the-money weekly puts and calls over the next few weeks until the initial trade turns into a net gain.

This week’s choice is TDAmeritrade (AMTD) which announces before the market opens on Tuesday, April 24, 2018.  Implied volatility (IV) of the 27Apr18 options has not escalated at this point – it is 32.5, barely higher than a six-week-out 25May18 series (31).  We expect IV for the 27Apr18 series to move much higher over the next 10 days, and we hope to take advantage of higher option prices as well as a possibly higher stock price before the announcement date.

Here are the trades we made this week.  Note that the diagonals were set up at a small debit rather than the credit that we seek with this strategy, but when we roll over the 20Apr17 puts and calls to the next weekly series, we expect to create solid credits, especially if IV for those options moves higher as we expect.

BTO 1 AMTD 25May18 57 put (AMTD180525P57)
STO 1 AMTD 20Apr18 60 put (AMTD180420P60) for a debit of $.11  (buying a diagonal)

BTO 1 AMTD 25May18 64 call (AMTD180525C64)
STO 1 AMTD 20Apr18 61 call (AMTD18042061) for a debit of $.28  (buying a diagonal)

Once we roll over these options to the 27Apr17, we expect our net investment will be about $250 per set of spreads ($300 maintenance requirement less $50 net credit).  Here is the risk profile graph for those spreads after the roll has been made:

AMAT Risk Profile Graph April 2018

For the past 8 quarters, the post-announcement fluctuation has averaged 1.75%.  This graph shows that a profit should result if the stock fluctuates less than 5% in either direction.  The potential gains may not appear to be significant, but there seems to be a fair chance to make 20% on the investment for a single week of waiting.