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Earnings Trader
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Cabot Options Institute – Earnings Trader Issue: February 6, 2023

Weekly Earnings Commentary

The probabilities continue to lead to the way!

Last week, we placed an earnings trade in Starbucks (SBUX). Per usual, we used an iron condor, but went with a slightly more conservative approach by increasing our probabilities of success on both sides of the trade to just over 90%.

Thankfully, SBUX opened up well within our chosen range after earnings and as a result we were able to immediately take off the trade for a one-day profit of just under 6%. For those who waited a little longer to take off the trade, a 9.5% return was easily attainable.

The profit in SBUX marked our fourth winning trade (out of four) this earnings season for a cumulative total of 20.7%. All four trades have been one-day, overnight trades.

This week my focus, as mentioned in our most recent weekly webinar, will be on Disney (DIS) and PayPal (PYPL). We haven’t had much success with Disney over the past two earnings seasons, but I’ll take my chances if we are able to create a trade with a high probability of success while still maintaining a decent level of premium.

I also like PayPal this week. The implied volatility and IV rank are high, which allows us to create a trading range outside of the expected move. We went over a few different scenarios in our last weekly webinar and found that we can create a range that swallows all but one of PYPL’s earnings reactions. As a result, a trade looks favorable at the moment. I’ll take a closer look as we near PYPL’s earnings announcement.

Weekly Watchlist

  • CVS Health (CVS)
  • Disney (DIS)
  • Wynn Resorts (WYNN)
  • PayPal (PYPL)

We discussed numerous trades in our weekly subscriber-only webinar going through each trade in a step-by-step manner. My hope is that we can make one to two trades this week. Our average number of trades per earnings season is approximately eight to 10 trades.

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 (2/6-2/10) if you are so inclined:

COI_ET_020623_earningscalendar.png

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.

Potential Trade Ideas for Next Week

Disney (DIS)

DIS is due to announce earnings Wednesday after the closing bell. The stock is currently trading for 110.71.

IV Rank: 26.1

Expected Move for the February 17, 2023, Expiration Cycle: 103 to 118

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 103 to 118.

If we look at the call side of DIS for the February 17, 2023, expiration, we can see that selling the 125 call strike offers a 91.21% probability of success. The 125 call strike sits just above the expected move, or 118.

COI_ET_020623_DIS_bearcall.png

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 103. The 99 put, with an 86.97% probability of success, works.

COI_ET_020623_DISbullput.png

We can create a trade with a nice probability of success if DIS stays within the 26-point range, or between the 125 call strike and the 99 put strike. Our probability of success on the trade is 91.21% on the upside and 86.97% on the downside.

Moreover, we have a 12.9% cushion to the upside and a 10.6% margin of error to the downside.

If we look at the earnings reactions since 11/9/2006, we can see that there have only been a few breaches of 8% to the upside or downside after an earnings announcement.

COI_ET_020623_DIS_earnreaction.png

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 DIS, I will send a trade alert with updated data.

Here is the potential trade (as always, if I decide to place a trade in DIS, I will send a trade alert with updated data):

Simultaneously:

Sell to open DIS February 17, 2023, 125 calls

Buy to open DIS February 17, 2023, 130 calls

Sell to open DIS February 17, 2023, 99 puts

Buy to open DIS February 17, 2023, 94 puts for roughly $0.60 or $60 per iron condor.

Our margin requirement would be roughly $440 per iron condor. Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 125 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 – 91.21% (call side) and 86.97% (put side)
  • The maximum return on the trade is the credit of $0.60, or $60 per iron condor
  • Max return: 13.6% (based on $440 margin per iron condor)
  • Break-even level: 125.60 – 98.40.

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

February 13, 2023.

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.