To Soar or Not To Soar? Iron Condors Into Earnings.

Iron Condors are a great Options strategy, especially in a high volatility market environment.  But are they the right strategy for an earnings based trade? 

That depends on several factors.  The most important is, of course, liquidity.  An Iron Condor is a four-legged spread, and therefore has a tendency to have a wide spread between the mid price and natural (nat) price.  This results in slippage on entry and exit, which is a big disadvantage to the retail investor.  You can minimize this by choosing to only trade Iron Condors into earnings if the underlying has an extremely liquid options market and a tight bid/ask spread.  This translates to a tight mid/nat spread.

Another important factor is how much higher front month implied volatility (IV) is compared to back month and historical volatility.  The higher the front month IV is in comparison, the better.  The key to trading Iron Condors into earnings is ensuring the break evens are at or outside the expected earnings move range.  A front month IV that is 2x or greater than historical IV will likely result in the ability to achieve this.

Commissions play a big role when deciding whether an Iron Condor is the right earnings based strategy.  Remember, you have to enter four legs per spread so be sure to consider round trip commission exposure per spread before entering.  If you pay $1.50 per contract, that’s $6 in and $6 out totaling $12 round trip.  Ensure your profit potential exceeds $12/spread by an amount reasonable enough to incur the risk of placing the trade.

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