Weekly Earnings Commentary
As we enter our second week of earnings trades, we are greeted with a plethora of opportunities. My focus this week will be on Morgan Stanley (MS) and American Express (AXP). That being said, there are several other stocks that could garner some attention as well, including Netflix (NFLX) and International Business Machines (IBM). So, given the number of potential opportunities this week, expect to see at least two, if not three, trade alerts as we move throughout the week.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Johnson & Johnson (JNJ)
- Goldman Sachs (GS)
- Netflix (NFLX)
- Morgan Stanley (MS)
- Tesla (TSLA)
- International Business Machines (IBM)
- American Express (AXP)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (4/17 to 4/21) if you are so inclined:
Images Courtesy of Slope of Hope
Trade Ideas for Next Week
As a reminder, you will quickly begin to notice I tend to stick with stocks that have high liquidity as it’s far easier to get in and out of a trade. Medium liquidity offers tradable options, but sometimes the bid-ask spread is wider, which means a greater potential for more price adjustments, making entering and exiting a trade difficult from time to time. Remember, there are roughly 3,200 tradable stocks with options and 11% have medium liquidity while only 3% have what’s considered high liquidity.
Potential Trade Ideas for This Week
America Express (AXP)
American Express (AXP) is due to announce earnings Thursday before the opening bell.
The stock is currently trading for 163.22.
- IV Rank: 36.2
Expected Move for the April 28, 2023, Expiration Cycle: 154 to 172
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 154 to 172.
- If we look at the call side of AXP for the April 28, 2023, expiration, we can see that selling the 175 call strike offers an 87.84% probability of success. The 175 call strike sits just above the expected move, or 172.
Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 154. The 150 put, with an 87.16% probability of success, works.
We can create a trade with a nice probability of success if AXP stays within the 25-point range, or between the 175 call strike and the 150 put strike. Our probability of success on the trade is 87.84% on the upside and 87.16% on the downside.
Moreover, we have a 7.2% cushion to the upside and an 8.1% margin of error to the downside.
If we look at the earnings reactions since 10/23/2006, we can see that there have been only a few breaches of 7% to the upside or downside after an earnings announcement.
Net Change – At the Opening Bell
Full Bar – Price Movement Throughout the Day
If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade.
Here is the potential trade (as always, if I decide to place a trade in AXP, I will send a trade alert with updated data):
Simultaneously:
Sell to open AXP April 28, 2023, 175 calls
Buy to open AXP April 28, 2023, 180 calls
Sell to open AXP April 28, 2023, 150 puts
Buy to open AXP April 28, 2023, 145 puts for roughly $0.70 or $70 per iron condor.
Our margin requirement would be roughly $430 per iron condor. Again, the goal of selling the AXP iron condor is to have the underlying stock stay below the 175 call strike and above the 150 put strike immediately after AXP earnings are announced.
Here are the parameters for this trade:
- The probability of success – 87.84% (call side) and 87.16% (put side)
- The maximum return on the trade is the credit of $0.70, or $70 per iron condor
- Max return: 16.3% (based on $430 margin per iron condor)
- Break-even level: 175.70 – 149.30.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
The next Cabot Options Institute – Earnings Trader issue will be published on April 24, 2023.