We are officially in the doldrums between earnings seasons. But an opportunity or two can still be found each week. And while the offseason earnings trades oftentimes lack all of the necessities for an actual trade, it’s still worth looking at potential trades as we patiently wait for another earnings season, if only for educational purposes.

Cabot Options Institute – Earnings Trader Issue: August 26, 2022

Before I get to this week’s issue, I wanted to let everyone know that starting September 12, our weekly issues will be released on Mondays instead of Fridays. This should allow me to give all of you more thorough weekly review and prep heading into the following week. As always, if you have any questions, comments or feedback, 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.

HP Inc. (HPQ)

COI_ET_082522_HPQ — Image Courtesy of Slope of Hope

Lululemon (LULU)

COI_ET_082522_LULU — Image Courtesy of Slope of Hope

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 (8/29 to 9/2) if you are so inclined:

COI_ET_082522_earningscalendar — Image Courtesy of Slope of Hope

Trade Ideas for Next Week

Lululemon (LULU)
LULU is due to announce earnings next Thursday (September 1) after the closing bell. The stock is currently trading for 318.17.

IV Rank: 55.8

Expected Move for the September 9, 2022, Expiration Cycle: 290 to 345

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 290 to 345.

If we look at the call side of LULU for the September 9, 2022, expiration, we can see that selling the 365 call strike offers a 90.30% probability of success. The 365 call strike sits just above the expected move, or 345. We can define our risk through buying the 370 call, thereby creating a five-strike-wide bear call spread at the 365/370 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 290. The 265 put, with an 89.76% probability of success, works. Staying with a five-strike-wide spread, I can buy the 260 put to define our risk and create a bull put spread at the 265/260 strikes.

We can create a trade with a nice probability of success if LULU stays within the 100-point range, or between the 365 call strike and the 265 put strike. Our probability of success on the trade is 90.30% on the upside and 89.76% on the downside.

Moreover, we have a 14.7% cushion to the upside and 16.7% margin of error to the downside.

Here is the trade:

Simultaneously:

Sell to open LULU September 9, 2022, 365 calls
Buy to open LULU September 9, 2022, 370 calls
Sell to open LULU September 9, 2022, 265 puts
Buy to open LULU September 9, 2022, 260 puts for roughly $0.70, or $70 per iron condor

Our margin requirement would be $430 per iron condor. Again, the goal of selling the LULU iron condor is to have the underlying stock stay below the 365 call strike and above the 265 put strike immediately after LULU earnings are announced.

Here are the parameters for this trade:

The probability of success: 90.30% (call side) and 89.76% (put side)
The maximum return on the trade is the credit of $0.70, or $70 per iron condor
Max return: 16.3%
Break-even level: 365.70 – 264.30

Summary
LULU offers a decent opportunity. But as I spoke about during our webinar last week, we are in between earnings cycles, so the opportunities are far fewer at the moment. While LULU offers a tempting trade due to its inflated premium and IV rank, the earnings reactions are a bit more volatile than I prefer, and therefore I will probably stay away from any trades next week.

The next Cabot Options Institute – Earnings Trader issue will be published on September 2, 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.