Arcángel de Jesús Montoya
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Arcángel de Jesús Montoya in Money Trafficking,

Earn A 3:1 Return In Salesforce's Options By Friday (CRM) is reporting its quarterly earnings (Q1) on Wednesday, May 18, after the market close. Investors are very nervous about the numbers: this is evident in the price of the straddle expiring on Friday, May 20, 2016. This straddle is worth around 8% today (an implied volatility of 90% - 95%, according to Yahoo Finance):

(Source: Yahoo Finance)

If you are a risk-taker, here is a trade for you: get yourself an iron condor. This strategy works fine when the realized volatility in the underlying (i.e. the stock does not move as much on the earnings day and before the options' expiration). Basically, you sell a straddle in order to capture the fat premiums and buy a strangle to limit exposure in either direction. I recommend the following trade:


The risk-return profile looks as follows:


As you can see, the above trade offers a 3.7:1 risk-return ratio, which I find spectacular. This return is possible due to the time decay profiles of ATM and OTM options. Hence, if the stock closes between approximately $75 and $79 per share, investors will earn a nice return in just three days. In addition, this trade results in an immediate credit balance of $2.36 per share (keep in mind that the minimum trade size is 100 options). The maximum risk at expiration is $0.64 per share, or at least $64 per trade.

I am looking forward to the market opening because I think this trade is very interesting to me from the risk-return perspective. What do the readers think?