An iron condor with LEN

Hey Five Star Trader,

A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For this edition of my Tuesday Trade example, I want to talk to you about how to trade earnings using options strategies with my example in Lennar (LEN).

What led me to LEN?

I was originally looking at LEN for a potential neutral play because my Hot Zone earnings tool showed me that its moves, in general, were all well below the market money maker (MMM). However, LEN had high implied volatility, because homebuilders had been hot and investors were anticipating the report, which is why I went with a neutral trade with a bullish slant.

Fun Fact: The money market maker indicates the expected magnitude of an upcoming move on earnings.

Breaking down the trade…

I chose to get into an iron condor and was looking at the expected MMM of $3.38. I sold the at the money calls and puts, which at the time was 88.71, and bought the wings at $3 wide. At this point, everything was looking pretty good because it was $3 wide and I received a $2.29 credit. Therefore, this meant my risk very low, at .70. 

($3 iron condor – 2.29 credit = .70 risk)


Now came the results of the report. Initially, the company wasn’t really moving. There were a few spikes up and down, but for the most part, price was sitting around $90. I thought I was setting myself up for a perfect iron condor, but I made the crucial mistake of not realizing something was on the calendar.

My big mistake was not realizing their conference call was the following day. Normally, the report and the conference call land on the same day, but this was not the case for LEN. After their conference call, LEN exploded to the upside, so while the overall data made sense, the risk-reward makes sense, I did end up losing money on the trade.

Though I did ultimately lose on this trade, I still like to use it as an example because the overall data and thought process were correct. I was setting up for a perfectly called iron condor the day of the report, I was just not aware of the call.

Moral of the story: although it’s rare, never assume the report and the conference call are on the same day.

Want to learn more about how to take advantage of quarterly gains? Join me for my free webinar on Wednesday, March 31st, at 7:00 pm Central. We will be covering setups, case studies, and more.

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