LRCX Diagonal Condor Earnings Play

This is a possible option play using the Diagonal Condor Earnings Strategy that we recently sent you details about.

Lam Research (LRCX) announces earnings after the close on Tuesday, April 17, 2018. The stock has been on a downtrend for the past several weeks, a good indication that expectations are seriously lowered.  We have seen many instances when lowered expectations have resulted in a higher post-announcement date regardless of how well or poorly the actual results were compared to estimates. If you agree with this prognosis, you might consider making these trades (when the stock is trading about $196):

Buy To Open # LRCX 18May18 180 puts (LRCX180518P180)
Sell To Open # LRCX 20Apr18 195 puts (LRCX180420P195) for a credit of $2.20  (buying a diagonal)

Buy To Open # LRCX 18May18 220 calls (LRCX180518C220)
Sell Open # LRCX 20Apr18 205 calls (LRCX180420C205) for a debit of $.30  (buying a diagonal)

This is the risk profile graph for the options which expire on Friday, April 20, 2018 at a time when LRCX was trading about $196 and assuming the implied volatility of the May 25 options will fall from their current 43 to 38 after the earnings announcement on April 17^th:

LRCX Risk Profile Earnings Graph April 2018

The two spreads will involve an investment of about $1400 per pair of spreads.  The maintenance requirement is $1500 and there is a net credit of about $100 after commissions.  If the stock were to end up at any price between $195 and $205, the graph shows that a gain of about 50% on investment would come our way.

The break-even range extends from about a 5% drop to an 8% rise.  This is well within the 4.9% average fluctuation that LRCX has made over the past 8 quarterly announcements.

Since there is a net credit from selling the two spreads, one of the spreads essentially is guaranteed to make a profit.  If the stock were to end up at any price between $195 and $205, both April 20 short options would expire worthless and the May 18 options would still have significant residual value.

If the stock were to fluctuate so much that it ended up outside the $195 – $205 range, the expiring April 20 options could be rolled over to out-of-the-money options in the April 27 series, likely at a credit.  There would be 5 additional weeks where short-term premium might be collected so that the original spreads might ultimately prove to be profitable even though it did not work out as expected in the announcement week.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry