Next week offers up several wonderful opportunities. Home Depot (HD), Walmart (WMT), Lowe’s (LOW), Target (TGT) and Cisco Systems (CSCO) are all due to announce and my guess is that we will take at least two if not three of those trades. In fact, there is a good chance that we will have two trades on Monday as HD and WMT are due to announce before the opening bell.
This past week we had another trade that exceeded the expected move. We placed an iron condor around Disney’s (DIS) expected move, yet once again, our short call strike was tested. We ended up getting out of the trade for a small loss, but had we held on just an hour or two longer we would have had a nice profit as DIS pushed below our short 121 call strike and into profitable territory.
Cabot Options Institute – Earnings Trader Issue: August 12, 2022
Next week offers up several wonderful opportunities. Home Depot (HD), Walmart (WMT), Lowe’s (LOW), Target (TGT) and Cisco Systems (CSCO) are all due to announce and my guess is that we will take at least two if not three of those trades. In fact, there is a good chance that we will have two trades on Monday as HD and WMT are due to announce before the opening bell.
This past week we had another trade that exceeded the expected move. We placed an iron condor around Disney’s (DIS) expected move, yet once again, our short call strike was tested. We ended up getting out of the trade for a small loss, but had we held on just an hour or two longer we would have had a nice profit as DIS pushed below our short 121 call strike and into profitable territory. Admittedly, I’ve never seen this many stocks push outside of the expected moves since I started trading earnings back in 2017. Doesn’t matter—losses will come and we’ve done a great job of keeping our losses to a minimum with the understanding that the law of large numbers will work out over the long term. And we still have time to bring ourselves back to just above break-even if all goes well over the next week or so.
As a reminder, we will have a subscriber-exclusive webinar every Friday during earnings season, so make sure to sign up. Here is a link to today’s (August 12) webinar at noon ET.
And of course, as always, if you have any questions please do not hesitate to email me at andy@cabotwealth.com.
The Week Ahead
Below are several companies that I think could offer a few trading opportunities next week.
Below are a few more ideas for those of you who tend to be a bit more aggressive.
Top Earnings Options Plays
Here are a few top earnings options plays for next week (8/15 to 8/19) if you are so inclined:
Trade Ideas for Next Week
Walmart (WMT)
WMT is due to announce earnings next Tuesday (August 16) before the opening bell. The stock is currently trading for 129.75.
IV Rank: 55.7
Expected Move for the August 19, 2022, Expiration Cycle: 124.5 to 135
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 124.5 to 135.
If we look at the call side of WMT for the August 19, 2022, expiration, we can see that selling the 138 call strike offers an 87.65% probability of success. The 138 call strike sits just above the expected move, or 135. We can define our risk through buying the 143 call, thereby creating a five-strike-wide bear call spread at the 138/143 call strikes.
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 124.5. The 122 put, with an 83.89% probability of success, works. Staying with a five-strike-wide spread, I can buy the 117 put to define our risk and create a bull put spread at the 122/117 strikes.
We can create a trade with a nice probability of success if WMT stays within the 16-point range, or between the 138 call strike and the 122 put strike. Our probability of success on the trade is 87.65% on the upside and 83.89% on the downside.
Moreover, we have a 6.4% cushion to the upside and 6.0% margin of error to the downside … well outside all but six earnings reaction in WMT since 2006 (see below).
Here is the trade:
Simultaneously:
Sell to open WMT August 19, 2022, 138 calls
Buy to open WMT August 19, 2022, 143 calls
Sell to open WMT August 19, 2022, 122 puts
Buy to open WMT August 19, 2022, 117 puts for roughly $0.73 or $73 per iron condor
Our margin requirement would be $427 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 138 call strike and above the 122 put strike immediately after WMT earnings are announced.
Here are the parameters for this trade:
- The probability of success: 87.65% (call side) and 83.89% (put side)
- The maximum return on the trade is the credit of $0.73, or $73 per iron condor
- Max return: 17.1%
- Break-even level: 121.27 – 138.73
Summary
WMT offers a decent opportunity for a trade and one that I will be focusing on next week, along with several others. That being said, there are various other opportunities that should come our way next week so be prepared for at least two alerts, potentially more if all goes well. Of course, Mr. Market will dictate our decisions.
The next Cabot Options Institute – Earnings Trader issue will be published on August 19, 2022.
About the Analyst
Andy Crowder
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.