Weekly Earnings Commentary
We had the good fortune to lock in a gain in Home Depot (HD) early last week. The win marked our sixth this earnings season for a cumulative total of 36.9%. That’s a healthy return for this earnings season, especially when you consider the S&P 500 is basically flat since our first trade in JPM back on January 12, 2023. Hopefully the market offers up a few more opportunities to increase our current totals.
Earnings season is winding down, but we still have a few opportunities over the next few weeks and several more during the earnings doldrums.
As a reminder, there will be no more Friday webinars until around mid-April when earnings season ramps back up. Until then, expect to see a few potential trades on a week-to-week basis in the weekly issues, some of which I plan on acting on.
- Target (TGT)
- Lowe’s (LOW)
- Costco (COST)
If you have any questions, please do not hesitate to email me at firstname.lastname@example.org.
Top Earnings Options Plays
Here are a few top earnings options plays for this week (2/27 to 3/3) if you are so inclined:
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.
Potential Trade Ideas for This Week
COST is due to announce earnings Thursday after the closing bell. The stock is currently trading for 488.61.
IV Rank: 16.9
Expected Move for the March 10, 2023, Expiration Cycle: 455 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 455 to 520.
If we look at the call side of COST for the March 10, 2023, expiration, we can see that selling the 525 call strike offers a 90.35% probability of success. The 525 call strike sits just above the expected move, or 520.
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 455. The 450 put, with an 87.68% probability of success, works.
We can create a trade with a nice probability of success if COST stays within the 75-point range, or between the 525 call strike and the 450 put strike. Our probability of success on the trade is 90.35% on the upside and 87.68% on the downside.
Moreover, we have a 7.4% cushion to the upside and a 7.9% margin of error to the downside.
If we look at the earnings reactions since 12/13/2006, we can see that there have only been a few breaches of 4% to the upside or downside after an earnings announcement.
As a result, an iron condor looks plausible. However, I would like to widen my current range if and when I make a trade this week. As always, IF I decide to place a trade in COST, I will send a trade alert with updated data.
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):
Sell to open COST March 10, 2023, 525 calls
Buy to open COST March 10, 2023, 530 calls
Sell to open COST March 10, 2023, 450 puts
Buy to open COST March 10, 2023, 445 puts for roughly $0.80 or $80 per iron condor.
Our margin requirement would be roughly $420 per iron condor. Again, the goal of selling the COST iron condor is to have the underlying stock stay below the 525 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 – 90.35% (call side) and 87.68% (put side)
- The maximum return on the trade is the credit of $0.80, or $80 per iron condor
- Max return: 19.0% (based on $420 margin per iron condor)
- Break-even level: 525.80 – 449.20.
As always, if you have any questions, please do not hesitate to email me at email@example.com.
The next Cabot Options Institute – Earnings Trader issue will be published on
March 6, 2023.