Cabot Options Institute – Earnings Trader Issue: January 23, 2023

Weekly Earnings Commentary

Last week was a bit of a dud for earnings announcements.

While numerous companies announced earnings, only a few companies met our guideline of having high levels of options liquidity. But that all changes this week.

This week could be the busiest of the earnings season with upwards of seven potential trades. My guess is that we will make anywhere from 3 to 5 trades with most of the trading activity occurring during the latter half of the week.

I went over the seven potential trades in last week’s subscriber-only webinar, but for those that were unable to make it my focus will be on the following companies this week:

3M (MMM)
Microsoft (MSFT)
International Business Machines (IBM)
Mastercard (MA)
Visa (V)
American Express (AXP)

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 (1/23-27) 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 Next Week

Mastercard (MA)

MA is due to announce earnings Thursday before the opening bell. The stock is currently trading for 376.28.

IV Rank: 14.1

Expected Move for the January 27, 2023, Expiration Cycle: 359 to 393

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 359 to 393.

If we look at the call side of MA for the February 3, 2023, expiration, we can see that selling the 405 call strike offers a 90.81% probability of success. The 405 call strike sits just above the expected move, or 193.

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 359. The 352.5 put, with an 82.96% probability of success, works.

We can create a trade with a nice probability of success if MA stays within the 57.5-point range, or between the 405 call strike and the 352.5 put strike. Our probability of success on the trade is 90.81% on the upside and 82.96% on the downside.

Moreover, we have a 7.6% cushion to the upside and a 6.3% margin of error to the downside.

If we look at the earnings reactions since 11/01/2006, we can see that there have only been a few breaches of 6% to the upside or downside after an earnings announcement. As a result, an iron condor looks plausible. As always, IF I decide to place a trade in MA, I will send a trade alert with updated data.

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

Simultaneously:

Sell to open MA February 3, 2023, 405 calls

Buy to open MA February 3, 2023, 410 calls

Sell to open MA February 3, 2023, 352.5 puts

Buy to open MA February 3, 2023, 347.5 puts for roughly $0.90 or $90 per iron condor.

Our margin requirement would be roughly $41 per iron condor. Again, the goal of selling the MA iron condor is to have the underlying stock stay below the 405 call strike and above the 352.5 put strike immediately after MA earnings are announced.

Here are the parameters for this trade:

The probability of success – 90.81% (call side) and 82.96% (put side)
The maximum return on the trade is the credit of $0.90, or $90 per iron condor
Max return: 22.0% (based on $410 margin per iron condor)
Break-even level: 405.90 – 351.60.

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

January 30, 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.