Weekly Earnings Commentary
We are officially in the earnings doldrums, but that certainly doesn’t mean that opportunities won’t present themselves. For instance, this week Costco (COST) announces earnings after the close Thursday and offers a decent opportunity for an iron condor and potentially another candidate for a short strangle.
I’ve gone over an iron condor example for COST in the “Weekly Trade Ideas” section below and, as always, I’ll let everyone know (in a separate alert) whether I will be making the trade.
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 (12/05 to 12/09) 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.
Costco Wholesale (COST)
Costco is due to announce earnings Thursday after the closing bell. The stock is currently trading for 494.53.
IV Rank: 34.6
Expected Move for the December 16, 2022, Expiration Cycle: 470 to 520
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 470 to 520.
If we look at the call side of COST for the December 16, 2022, expiration, we can see that selling the 535 call strike offers an 88.45% probability of success. The 535 call strike sits just above the expected move, or 520. We can define our risk through buying the 540 call, thereby creating a five-strike-wide bear call spread at the 535/540 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 470. The 450 put, with an 87.12% probability of success, works. Staying with a five-strike-wide spread I can buy the 445 put to define our risk and create a bull put spread at the 450/445 strikes.
We can create a trade with a nice probability of success if COST stays within the 85-point range, or between the 535 call strike and the 450 put strike. Our probability of success on the trade is 88.45% on the upside and 87.12% on the downside.
Moreover, we have an 8.2% cushion to the upside and 9.0% margin of error to the downside … well outside every historic earnings reaction in COST since 2006 (see below).
Courtesy of Slope of Hope
Here is the potential trade (as always, if I decide to place a trade in COST, I will send a trade alert with updated data):
Simultaneously:
Sell to open COST December 16, 2022, 535 calls
Buy to open COST December 16, 2022, 540 calls
Sell to open COST December 16, 2022, 450 puts
Buy to open COST December 16, 2022, 445 puts for roughly $0.95 or $95 per iron condor.
Our margin requirement would be $405 per iron condor. Again, the goal of selling the COST iron condor is to have the underlying stock stay below the 535 call strike and above the 450 put strike immediately after COST earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.45% (call side) and 87.12% (put side)
- The maximum return on the trade is the credit of $0.95, or $95 per iron condor
- Max return: 23.5%
- Break-even level: 535.95 – 449.05.
The next Cabot Options Institute – Earnings Trader issue will be published on
December 12, 2022.