Iron Condor - Profiting from $NVO Earnings with Options

In recent years, $Novo-Nordisk A/S(NVO)$ has been one of the best-performing pharmaceutical stocks on the U.S. market.

Even during the broad market correction of 2022, NVO's stock surged over 20% thanks to the blockbuster weight loss drug Wegovy. Since early 2019, the stock has skyrocketed more than sixfold.

NVO's impressive performance is closely tied to its strong earnings reports, which often signal profitable trading or investment opportunities.

Over the past two years, NVO's earnings growth has been explosive.

With products like Wegovy, a GLP-1 class drug for diabetes and obesity management, the company's growth has accelerated. Revenue grew over 25% in 2022 and more than 30% in 2023, with net profit soaring over 50% year-over-year in 2023.

However, starting in November 2023, Eli Lilly's new weight loss drug, Zepbound, received FDA approval and began eating into NVO's market share. The competition between these two giants in the weight loss drug market has become a major focus.

Compared to $Eli Lilly(LLY)$ 's Zepbound, Wegovy is more expensive. Wegovy costs around $1,349 per month, nearly 30% more than Zepbound's $1,060. While Eli Lilly claims its product shows better results in Phase 3 trials, there’s no head-to-head comparison yet to confirm this.

Wegovy's advantage lies in its early market entry, giving it a head start in brand and channel development. As both a health management and aesthetic product, Wegovy benefits from a wider commercialization and deeper brand presence. Additionally, Wegovy’s production capacity was ramped up earlier, which helps with supply and market share expansion.

NVO Options Market Expectations

$Novo-Nordisk A/S(NVO)$ will release its latest financial results on August 7, 2024. Historically, the options market has overestimated NVO stock's earnings volatility 83% of the time over the past 12 quarters. Post-earnings forecast changes average ±5.6%, while actual earnings changes average 3.8% (absolute value).

Currently, the implied volatility for NVO is ±6.8%, suggesting that the options market is betting on a single-day price movement of up to 6.8%. In the past twelve earnings reports, the maximum one-day gain was 6.4%, and the maximum one-day loss was 4.4%.

For the upcoming earnings report, investors might consider an Iron Condor options strategy.

What is an Iron Condor?

The Iron Condor involves four options: two call options and two put options. It's used when you expect the stock price to stay within a narrow range or to see significant price movement. This strategy limits both risk and profit. Named for its profit-loss diagram resembling an eagle, the Iron Condor strategy involves.

Bullish Iron Condor: For investors expecting significant price movement (up or down). This strategy uses four options with equal price intervals, with a 1:1:1:1 ratio. Maximum profit occurs if the stock price is above the highest strike price or below the lowest strike price at expiration.

Bearish Iron Condor: For investors expecting minimal price movement. This strategy also uses four options with equal intervals, with a 1:1:1:1 ratio. Maximum profit happens if the stock price stays between the two middle strike prices at expiration, yielding the net premium received.

Vladimir Zakharov/iStock via Getty Images

A Bearish Iron Condor for NVO

For a bearish Iron Condor on NVO, you can set up the strategy as follows:

• Step 1：Sell a NVO put with a strike price of $119 (expiring on August 9) for a gain of $110 (1.1×100) .

• Step 2：Buy a NVO put option with a strike price of $109 (expiring August 9) and pay $31 (0.31×100).

• Step 3：Sell a NVO call option with a strike price of $139 (expiring August 9) for a gain of $135 (1.35×100).

• Step 4：Buy a NVO call option with a strike price of $149 (expiring August 9) and pay $21 (0.21×100).

After completing these trades, the strategy will generate a net premium of $193.

If $Novo-Nordisk A/S(NVO)$ ’s stock price is between $119 and $139 at expiration, all options expire worthless, and the trader will keep the full $193 premium. This is the maximum potential profit for this trade.

With $Novo-Nordisk A/S(NVO)$ currently priced at $129, the stock has room to move down by 7.75% or up by 7.75%. As long as it stays within this range, the investor can capture the full profit.

In this example, the Bearish Iron Condor bets that NVO’s stock will not swing significantly. Statistically, large price swings are rare, so Iron Condors often have a high success rate, offering opportunities for small, consistent profits. Ideally, investors set strike prices far enough from the current stock price to minimize the chance of maximum loss.