Weekly Earnings Commentary
We are entering what could be the slowest week of the year for the earnings calendar.
However, that can’t be said for the macro front, as it will be an eventful week headlined by the Bureau of Labor Statistics’ release of the November Consumer Price Index. Investors will not only be hyper-focused on the headline inflation index but also the FOMC announcement and subsequent press conference with Fed Chair Jerome Powell on Wednesday.
That being said, there is one little earnings gem to be had and that’s in Oracle (ORCL). Today, ORCL announces earnings after the closing bell and there could be a decent opportunity there, especially for those willing to use a short strangle. I’ll discuss the trade potential trade in more detail below.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Top Earnings Options Plays
Here are a few top earnings options plays for this week (12/12 to 12/16) if you are so inclined:
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.
Oracle (ORCL)
ORCL is due to announce earnings Monday after the closing bell. The stock is currently trading for 79.86.
IV Rank: 62.7
Expected Move for the December 16, 2022, Expiration Cycle: 74 to 86
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 74 to 86.
If we look at the call side of ORCL for the December 16, 2022, expiration, we can see that selling the 89 call strike offers an 88.19% probability of success. The 89 call strike sits just above the expected move, or 86.
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 74. The 70 put, with an 87.24% probability of success, works.
We can create a trade with a nice probability of success if ORCL stays within the 19-point range, or between the 89 call strike and the 70 put strike. Our probability of success on the trade is 88.19% on the upside and 87.24% on the downside.
Moreover, we have an 11.4% cushion to the upside and 12.3% margin of error to the downside … well outside of almost every historic earnings reaction in ORCL since 2007 (see below).
Courtesy of Slope of Hope
Here is the potential trade (as always, if I decide to place a trade in ORCL, I will send a trade alert with updated data):
Simultaneously:
Sell to open ORCL December 16, 2022, 89 calls
Sell to open ORCL December 16, 2022, 70 puts for roughly $0.95 or $95 per iron condor.
Our margin requirement would be roughly $800 per short strangle. Again, the goal of selling the ORCL short strangle is to have the underlying stock stay below the 89 call strike and above the 70 put strike immediately after ORCL earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.19% (call side) and 87.24% (put side)
- The maximum return on the trade is the credit of $0.98, or $98 per iron condor
- Max return: 12.3% (based on $800 margin per short strangle)
- Break-even level: 89.98 – 69.12
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
December 19, 2022.