The upcoming week of earnings is a fairly slow one, with only a few real choices on the docket. Disney (DIS) is definitely the highlight of the week and the one I will be focusing on.
However, the following week we see lots of the big boys due to report, including Walmart (WMT), Home Depot (HD), Lowe’s (LOW), Target (TGT), Cisco Systems (CSCO) and several others.
Cabot Options Institute – Earnings Trader Issue: August 5, 2022
The upcoming week of earnings is a fairly slow one, with only a few real choices on the docket. Disney (DIS) is definitely the highlight of the week and the one I will be focusing on.
However, the following week we see lots of the big boys due to report, including Walmart (WMT), Home Depot (HD), Lowe’s (LOW), Target (TGT), Cisco Systems (CSCO) and several others.
As for this past week, we were able to get out for a small 3.1% loss in CAT and then managed to follow up the trade the next day with a 11.1% winner in SBUX. There is no doubt we’ve seen some incredible moves this earnings season, which I outlined in greater detail last week, but as I always say, the law of large numbers will work out and it’s up to us, through proper risk management, to allow the statistical law to work its magic.
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 5) 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 (8/8 to 8/12) if you are so inclined:
Trade Ideas for Next Week
Disney (DIS)
DIS is due to announce earnings next Wednesday (August 10) after the closing bell. The stock is currently trading for 108.45.
IV Rank: 58.57
Expected Move for the August 12, 2022, Expiration Cycle: 102 to 115
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 102 to 115.
If we look at the call side of DIS for the August 12, 2022, expiration, we can see that selling the 117 call strike offers an 84.57% probability of success. The 117 call strike sits just above the expected move, or 115. We can define our risk through buying the 122 call, thereby creating a five-strike-wide bear call spread at the 117/122 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 102. The 99 put, with an 84.70% probability of success, works. Staying with a five-strike-wide spread, I can buy the 94 put to define our risk and create a bull put spread at the 99/94 strikes.
We can create a trade with a nice probability of success if DIS stays within the 18-point range, or between the 117 call strike and the 99 put strike. Our probability of success on the trade is 84.57% on the upside and 84.70% on the downside.
Moreover, we have a 7.9% cushion to the upside and 8.7% margin of error to the downside … well outside almost every historic earnings reaction in DIS since 2006 (see below).
Here is the trade:
Simultaneously:
Sell to open DIS August 12, 2022, 117 calls
Buy to open DIS August 12, 2022, 122 calls
Sell to open DIS August 12, 2022, 99 puts
Buy to open DIS August 12, 2022, 94 puts for roughly $0.88 or $88 per iron condor
Our margin requirement would be $412 per iron condor. Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 117 call strike and above the 99 put strike immediately after DIS earnings are announced.
Here are the parameters for this trade:
- The probability of success: 84.57% (call side) and 84.70% (put side)
- The maximum return on the trade is the credit of $0.88, or $88 per iron condor
- Max return: 21.4%
- Break-even level: 98.12 – 117.88
Summary
DIS 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 12, 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.