Trading isn’t easy.
Often it takes perseverance.
But in the end, you do what you have to do to fight for profit.
Such was the case with a post-earnings trade we put on Electronic Arts (NASDAQ: EA) in Earnings Trader on May 17.
The previous week on May 7, EA reported earnings and revenue that dropped sharply from a year earlier. But the company beat analyst expectations on both the top and bottom lines and raised sales guidance. The stock surged more than 7% the next day though it closed only about one percent higher.
Implied volatility (IV) underwent the expected post-earnings crush, dropping from 50% to 32%, which was still high. And while the IV rank of 30% didn’t blow anyone’s hair back, it still suggested that the crush wasn’t over. And that meant that EA was ripe for selling an iron condor.
Setting Up the Iron Condor
EA’s chart showed the 200-day moving average (green line in chart below) looming overhead as resistance. That helped us decide on shorting the 105 call strike, which was well above the 200-day.
On the put side, the shares had closed below the short 91 strike only once since early February. We like to use short strikes that are below potential support and above potential resistance. Thus, on May 17, we recommended selling the June 14 91p/88p/105c/108c iron condor for a limit of $0.95.
Unfortunately, it became clear the next day that we weren’t going to get filled. So, we revised the trade by raising the put strikes one point – to 92 (blue line below) and 89 – one point and dropped the credit limit to $0.90. That did the trick. In fact, we entered the spread at $0.92.
Managing the Trade
The stock spent the next several days trading along the bottom of its trading range, dipping below the short 92 put strike. Being so close to the money made us uncomfortable letting this trade go to expiration. The fight for profit was on.
On May 29, we rolled the spread out to the July 5 expiration and rolled the calls down to the 102 and 105 strikes for a $0.47 credit, giving us a total credit of $1.39. We liked the short 102 strike (red line below) because it was above the declining 200-day moving average, a trendline EA hadn’t closed above for nine months.
After the adjustment, EA went on a spurt that crested above the 200-day moving average though it never closed above the trendline. It then caromed lower, dipping below our short 92 put strike to hit a low at 90.46 on June 14. But when the stock edged higher and away from the 92, we were able to collect close to half of the original credit with two weeks until expiration.
The final tally showed subscribers nabbing a 27% return on a trade open for 34 days. That translated into a $528 profit on a $50,000 account with a 5% allocation per trade.
The lesson learned on this trade was that perseverance and patience paid off.
We had to give a little to enter the position and we had to withstand declines that moved our short put in the money. But by adjusting to extend duration and add credit, we kept the trade alive long enough to let the stock move back toward the middle of its range.
Trades won’t usually go your way right off the bat.
That’s when adjusting to keep the position in play and a profit within reach is the formula for success. EA was a perfect example, as it was Earnings Trader’s seventh winner among eight closed trades last earnings season. The fight for profit was certainly worth it.
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About The Author
Meet Jon Lewis, With over 20 years of real experience, teaching AND trading, Jon will help you learn to use options profitably and safely in portfolios of any size.
His advantage, and now yours, is using simple, often overlooked spread options strategies which generate consistent income without significant risk.