We will often look to place earnings trades as a way to stay engaged in the market and to increase our number of occurrences. These binary event trades are similar to our standard trades in that we are always looking to maximize our return on capital (ROC). That being said, we know that by defining our risk, we are able to increase our ROC while accepting a lower probability of profit (POP).
Today, Tom Sosnoff and Tony Battista take a look at three different Iron Condors placed around earnings announcements and see which is the best. First they look at Chicken Iron Condors. This is a risk 1 to make 1 trade where you collect half the width of the strikes. Here you have around a 50% POP and a ROC of 100%. They also look at collecting 1/3 the width of the spread for an Iron Condor. This will give you a POP of around 67% and a ROC of around 50%. The third trade they look at is an Iron Condor with the shorts placed at 1 Standard Deviation. These Iron Condors have a POP of over 84% but a ROC that is much lower, around 25%. The guys find out that if there's a large move after an earnings announcement it's better to risk 1 to make 1 and place the Chicken Iron Condor!
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