Cabot Options Institute – Earnings Trader Issue: April 24, 2023

Weekly Earnings Commentary

Forty-two percent of companies that reside in the S&P 500 are due to announce this week. What does this mean for us? Well, trades, trades and more trades.

As we discussed, in great detail, in the trading platform on last Friday’s call, my plan is to focus on MSFT, V, and CAT this week. Of course, as most of us know, things can change quickly. So, as much as I am focused on the three aforementioned stocks heading into the week, there is a chance I might go with a few others or simply add to the already established list for the week. Either way, I expect it to be a fairly busy week of trading, with the possibility of having multiple trades per day.

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Weekly Watchlist

3M (MMM)
United Parcel Service (UPS)
McDonald’s (MCD)
Microsoft (MSFT)
Alphabet (GOOGL)
Visa (V)
Mastercard (MA)
Caterpillar (CAT)
Intel (INTC)
Amgen (AMGN)
Chevron (CVX)
Exxon (XOM)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (4/24-4/28) if you are so inclined:

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

Microsoft (MSFT)

Microsoft (MSFT) is due to announce earnings Tuesday after the closing bell.

The stock is currently trading for 285.76.

IV Rank: 17.1
IV: 47.74%

Expected Move for the April 28, 2023, Expiration Cycle: 274 to 298

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 274 to 298.

If we look at the call side of MSFT for the April 28, 2023, expiration, we can see that selling the 302.5 call strike offers an 88.02% probability of success. The 302.5 call strike sits just above the expected move, or 298.

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 274. The 267.5 put, with an 87.54% probability of success, works.

We can create a trade with a nice probability of success if MSFT stays within the 35-point range, or between the 302.5 call strike and the 267.5 put strike. Our probability of success on the trade is 88.02% on the upside and 87.54% on the downside.

Moreover, we have a 5.9% cushion to the upside and a 6.4% margin of error to the downside.

If we look at the earnings reactions since 1/25/2007, we can see that there have been only a few breaches of 5% 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. At the time of the trade, my hope is that I can increase my “cushion,” or probabilities of success on the trade, as I would be far more comfortable. However, the premium must still make sense.

Here is the potential trade (as always, if I decide to place a trade in MSFT, I will send a trade alert with updated data):

Simultaneously:

Sell to open MSFT April 28, 2023, 302.5 calls

Buy to open MSFT April 28, 2023, 307.5 calls

Sell to open MSFT April 28, 2023, 267.5 puts

Buy to open MSFT April 28, 2023, 262.5 puts for roughly $0.80 or $80 per iron condor.

Our margin requirement would be roughly $420 per iron condor. Again, the goal of selling the MSFT iron condor is to have the underlying stock stay below the 302.5 call strike and above the 267.5 put strike immediately after MSFT earnings are announced.

Here are the parameters for this trade:

The probability of success – 88.02% (call side) and 87.54% (put side)
The maximum return on the trade is the credit of $0.80, or $80 per iron condor
Max return: 19.0% (based on $420 margin per iron condor)
Break-even level: 303.30 – 266.70.

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 May 1, 2023.