ArcelorMittal Earnings: What a 10% Options Move Can Teach Traders
By Koen Hoorelbeke, Investment and Options Strategist
Overview
ArcelorMittal is set to report its earnings on Thursday, and the options market is currently pricing in a potential move of over 10%. This article serves as a case study to help traders understand how to interpret expected moves from option chain data, structure a range-bound view using an iron condor, and clarify the distinction between defined risk and low risk.
Current Market Setup
As of the latest data, ArcelorMittal's shares were trading around EUR 50.60. The stock has shown a constructive long-term trend, remaining above its 200-day and 200-week moving averages, despite increased volatility following a strong rally and subsequent pullback. This volatility makes it a relevant case study for earnings trading.
Options Market Pricing
The 15 May monthly options indicate that the near-the-money 51-strike call and put are trading at a combined midpoint of approximately EUR 5.43. This suggests that the options market anticipates a broad price movement of about 10%, estimating a range of EUR 45 on the downside and EUR 56 on the upside. It is important to note that this expected move is an estimate and does not predict the direction of the stock price.
Iron Condor Strategy
This article focuses on a specific strategy: the iron condor, which is suitable for traders who believe the stock will remain within the expected range post-earnings. The example involves a long 41 put, a short 45 put, a short 56 call, and a long 60 call, generating a net credit of about EUR 1.04 per share.
Profit, Risk, and Breakeven Levels
The maximum profit from this iron condor is the premium received, approximately EUR 104, achieved if ArcelorMittal closes between EUR 45 and EUR 56 at expiry. The maximum risk is defined by the width of the spreads minus the premium received, amounting to about EUR 296 before costs. Breakeven levels are calculated as EUR 43.96 on the downside and EUR 57.04 on the upside.
Expected Outcomes and Risks
The ideal scenario for this iron condor is that the earnings reaction is smaller than the market-implied move, leading to a decrease in implied volatility and the stock price remaining between the short strikes. However, if the stock moves beyond these strikes, losses will begin to accumulate.
Alternative Strategies
For those with a clear directional view, other strategies like bull call spreads or bear put spreads may be more appropriate. A short strangle could also be considered, but it carries greater risk due to the lack of defined maximum loss.
Key Takeaways
This case study illustrates that trading around earnings is not solely about predicting company performance; it also involves aligning the trading strategy with market expectations, implied volatility, and risk management. The iron condor serves as a practical example of how to express a range-bound view based on the options market's pricing.