Cabot Options Institute – Earnings Trader Issue: January 9, 2023

Weekly Earnings Commentary

Earnings season officially starts this Friday with JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) kicking it off prior to the opening bell.

Other than the big banks it’s going to be a slow week for earnings, but hey, earnings season has finally arrived, and I expect that we will have one if not two trades heading into the latter part of the week.

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 (1/9-1-13) 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.

Trade Ideas for Next Week

JPMorgan Chase (JPM)

JPM is due to announce earnings Friday before the opening bell. The stock is currently trading for 37.36.

IV Rank: 25.9

Expected Move for the January 20, 2023, Expiration Cycle: 132 to 144

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 132 to 144.

If we look at the call side of JPM for the January 20, 2023, expiration, we can see that selling the 145 call strike offers an 82.42% probability of success. The 145 call strike sits just above the expected move, or 144.

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 132. The 129 put, with an 84.72% probability of success, works.

We can create a trade with a nice probability of success if JPM stays within the 16-point range, or between the 145 call strike and the 129 put strike. Our probability of success on the trade is 82.42% on the upside and 84.72% on the downside.

Moreover, we have a 5.1% cushion to the upside and a 6.5% margin of error to the downside.

If we look at the earnings reactions since 10/18/2006, we can see that there hasn’t been one breach of 5% to the upside or downside after an earnings announcement. As a result, an iron condor looks plausible.

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

Simultaneously:

Sell to open JPM January 20, 2023, 145 calls

Buy to open JPM January 20, 2023, 150 calls

Sell to open JPM January 20, 2023, 129 puts

Buy to open JPM January 20, 2023, 124 puts for roughly $0.96 or $96 per iron condor.

Our margin requirement would be roughly $404 per iron condor. Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 145 call strike and above the 129 put strike immediately after JPM earnings are announced.

Here are the parameters for this trade:

• The probability of success – 82.42% (call side) and 84.72% (put side)
• The maximum return on the trade is the credit of $0.96, or $96 per iron condor
• Max return: 23.8% (based on $404 margin per iron condor)
• Breakeven level: 145.96 – 128.04.

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 17, 2023.