Let’s analyze how we can structure an option trade that fits the view that 1) we think JPM stock will stay within the expected range, and 2) the response to the earnings report is likely to be positive.
Taking the at-the-money put and call for the July 16 expiration, we can see that the expected range is 2.93%.
Now that we know the expected range, let’s find a bull put spread that has the short strike roughly 2.93% below the stock price.
Selling the July 16, 150-strike put and buying the 145 put would create a bull put spread.
This spread was trading for around 37 cents on Friday. That means a trader selling this spread would receive $37 in option premium and would have a maximum risk of $463.
That represents a 7.99% return on risk between now and July 16 if JPMorgan stock remains above 150.
If JPMorgan stock closes below 145 on the expiration date, the trade loses the full $463.
The break-even point for the bull put spread is 149.63, which is calculated as 150 less the 0.37 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings.
An 8% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with a high risk tolerance.
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Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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