We had the good fortune to lock in two winning trades this past week in Home Depot (HD) and Walmart (WMT). Our win ratio now stands at 50%, well below the expected rate of 80% to 85%. That being said, we are just under break-even for the earnings cycle with the understanding that the law of large numbers will come to fruition as we continue to place more and more statistically-based trades.
As I’ve said numerous times and will again as a reminder during the upcoming webinar, my first three trades when I started using this approach back in 2017 were losing trades. In fact, they were big losers. I’m talking -34%, -40% and -60%. Yet, 117 trades later, when all was said and done, the cumulative total of the strategy was 932.2%.
Remember, the law of large numbers is defined by increasing the sample size, in our case the number of trades, and so far we only have eight trades under our belt. As I’ve stated over and over, just because a coin flip has a 50% probability of success, it doesn’t mean that for every 10 flips five are going to be heads and five tails.
Cabot Options Institute – Earnings Trader Issue: August 19, 2022
We had the good fortune to lock in two winning trades this past week in Home Depot (HD) and Walmart (WMT). Our win ratio now stands at 50%, well below the expected rate of 80% to 85%. That being said, we are just under break-even for the earnings cycle with the understanding that the law of large numbers will come to fruition as we continue to place more and more statistically-based trades.
As I’ve said numerous times and will again as a reminder during the upcoming webinar, my first three trades when I started using this approach back in 2017 were losing trades. In fact, they were big losers. I’m talking -34%, -40% and -60%. Yet, 117 trades later, when all was said and done, the cumulative total of the strategy was 932.2%.
Remember, the law of large numbers is defined by increasing the sample size, in our case the number of trades, and so far we only have eight trades under our belt. As I’ve stated over and over, just because a coin flip has a 50% probability of success, it doesn’t mean that for every 10 flips five are going to be heads and five tails. Same goes for our approach. I’ve been trading this approach long enough to understand that there will be losing quarters, that’s part of the journey. Sequence risk is always going to be part of taking a statistical approach and that is exactly what we’ve seen this quarter.
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 19) webinar at noon ET. This will be our last weekly webinar until the next earnings season rolls around. I will still continue to send out weekly issues with potential trades and plan on having a few trade alerts as well.
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, and their earnings reactions, that I think could offer a few decent 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 (8/22 to 8/26) if you are so inclined:
Trade Ideas for Next Week
Nvidia (NVDA)
NVDA is due to announce earnings next Wednesday (August 24) after the closing bell. The stock is currently trading for 183.35.
IV Rank: 35.1
Expected Move for the August 26, 2022, Expiration Cycle: 172 to 198
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 172 to 198.
If we look at the call side of NVDA for the August 26, 2022, expiration, we can see that selling the 207.5 call strike offers a 90.03% probability of success. The 207.5 call strike sits just above the expected move, or 198. We can define our risk through buying the 212.5 call, thereby creating a five-strike-wide bear call spread at the 207.5/212.5 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 172. The 162.5 put, with a 90.00% probability of success, works. Staying with a five-strike-wide spread, I can buy the 157.5 put to define our risk and create a bull put spread at the 162.5/157.5 strikes.
We can create a trade with a nice probability of success if NVDA stays within the 45-point range, or between the 162.5 call strike and the 207.5 put strike. Our probability of success on the trade is 90.03% on the upside and 90.00% on the downside.
Moreover, we have a 13.2% cushion to the upside and 11.4% margin of error to the downside … well outside all but six earnings reaction in NVDA since 2006.
Here is the trade:
Simultaneously:
Sell to open NVDA August 26, 2022, 207.5 calls
Buy to open NVDA August 26, 2022, 212.5 calls
Sell to open NVDA August 26, 2022, 162.5 puts
Buy to open NVDA August 26, 2022, 157.5 puts for roughly $0.68, or $68 per iron condor
Our margin requirement would be $432 per iron condor. Again, the goal of selling the NVDA iron condor is to have the underlying stock stay below the 207.5 call strike and above the 162.5 put strike immediately after NVDA earnings are announced.
Here are the parameters for this trade:
- The probability of success: 90.03% (call side) and 90.00% (put side)
- The maximum return on the trade is the credit of $0.68, or $68 per iron condor
- Max return: 15.7%
- Break-even level: 208.18 – 161.82
Summary
NVDA offers a decent opportunity for a trade and one that I will be focusing on next week. That being said, there are various other opportunities that should come our way next week so be prepared for at least one alert, 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 26, 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.