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Earnings Trader
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Cabot Options Institute – Earnings Trader Issue: April 3, 2023

Weekly Earnings Commentary

Earnings season is finally near, but we still have one week of little to no trading opportunities. Constellation Brands (STZ) offers the best opportunity of the week, but liquidity could be a potential issue. Otherwise, the metrics of the trade look quite appealing.

But no worries, legitimate trading opportunities are not far off. The following week offers several opportunities with the big banks due to announce next Friday (4/14), as Wells Fargo (WFC), JP Morgan Chase (JPM) and Citigroup (C) all report. There is no doubt I will be making a trade in at least one of those names, hopefully two. UnitedHealth Group (UNG) is another stock I will be following closely.

I will dig a bit deeper into several of the aforementioned stocks in my next issue. Stay tuned!

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

Weekly Watchlist

  • ConAgra (CAG)
  • Constellation Brands (STZ)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (4/3-4/6) if you are so inclined:

COI_ET_040223_earncalendar.png

Image 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

Constellation Brands (STZ)

Constellation Brands is due to announce earnings Thursday before the opening bell. The stock is currently trading for 225.89.

  • IV Rank: 32.5

Expected Move for the April 14, 2023, Expiration Cycle: 212.5 to 240

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 212.5 to 240.

  • If we look at the call side of STZ for the April 14, 2023, expiration, we can see that selling the 242.5 call strike offers an 89.81% probability of success. The 242.5 call strike sits just above the expected move, or 240.
COI_ET_040223_STZ_bearcall.png

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 212.5. The 210 put, with an 84.20% probability of success, works.

COI_ET_040223_STZ_bullput.png

We can create a trade with a nice probability of success if STZ stays within the 32.5-point range, or between the 242.5 call strike and the 210 put strike. Our probability of success on the trade is 89.81% on the upside and 84.20% on the downside.

Moreover, we have a 7.4% cushion to the upside and a 7.0% margin of error to the downside.

If we look at the earnings reactions since 1/4/2007, 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

COI_ET_040223_earnreactionsnet.png

Full Bar – Price Movement Throughout the Day

COI_ET_040223_earnreactionfullbar.png

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. I will say that my hesitation with STZ is liquidity. The bid-ask spread is a bit wide for my liking and coming in with size might move markets.

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

Simultaneously:

Sell to open STZ April 14, 2023, 242.5 calls

Buy to open STZ April 14, 2023, 247.5 calls

Sell to open STZ April 14, 2023, 210 puts

Buy to open STZ April 14, 2023, 205 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 STZ iron condor is to have the underlying stock stay below the 242.5 call strike and above the 210 put strike immediately after STZ earnings are announced.

Here are the parameters for this trade:

  • The probability of success – 89.81% (call side) and 84.20% (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: 243.20 – 209.30.

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 10, 2023.

Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.