Cabot Options Institute – Earnings Trader Issue: February 27, 2023

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.

Weekly Watchlist

Target (TGT)
Lowe’s (LOW)
Costco (COST)

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 (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

Costco (COST)

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):

Simultaneously:

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 andy@cabotwealth.com.

The next Cabot Options Institute – Earnings Trader issue will be published on

March 6, 2023.

Andy Crowder

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. 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.