Earnings season is finally in full swing next week with an abundance of high-quality, blue-chip companies due to announce.

Microsoft (MSFT), Visa (V), Mastercard (MA), and Apple (AAPL) are just a few of the names I’ll be focusing on. As you can see in “The Week Ahead” section below there are more than 15 stocks that I’ll be watching closely next week with the intent of making at least two, three, if not four trades.

Cabot Options Institute – Earnings Trader Issue: July 22, 2022

Earnings season is finally in full swing next week with an abundance of high-quality, blue-chip companies due to announce.

This past week was a good one for those who decided to trade Tesla (TSLA) or Netflix (NFLX). The two high-beta stocks offered some incredible premium and, consequently, a great opportunity to create a large range well outside the expected move of each stock. Both stocks opened, after earnings were announced, well inside their expected moves and as a result some nice profits could have been taken off the table.

But as I wrote last week, I tend to stick with more conservative stocks. It’s been working for me for a long time. It certainly doesn’t mean you can’t take a flyer on a riskier trade from time to time as long as you keep your position size in check and stick to the mechanics of the strategy. But, in my opinion, no one should be chasing stocks with high IVs on a consistent basis. It’s a recipe for a highly volatile equity curve.

I prefer companies that have fairly consistent earnings reactions. For example, take a look at the historical earnings reactions for Mastercard (MA) going back to November 2006. Since 2011 we’ve only seen MA push higher/lower by 5% twice. That’s right—two outliers! So that gives us a good starting point for a potential iron condor trade around earnings and one that I will take a closer look at in the trade section at the bottom of this issue.

Mastercard (MA)

COI_ET_earningsreactions_MA — Courtesy of Slope Hope

As a reminder, we will have a subscriber-exclusive webinar every Friday during earnings season, so make sure to sign up. Here is a link to today’s (July 22) webinar at noon ET.

The Week Ahead

Below are several companies that I think could offer a few trading opportunities next week.

Below are a few more ideas for those of you who tend to be a bit more aggressive.

Top Earnings Options Plays

Here are a few top earnings options plays for next week (7/25 to 7/29) if you are so inclined:

COI_ET_072122_earningscalendar — Courtesy of Slope of Hope

Trade Ideas for Next Week

Mastercard (MA)
MA is due to announce earnings next Thursday (July 28) prior to the opening bell. The stock is currently trading for 346.92.

IV Rank: 40.87

COI_ET_IVrank_MA — Courtesy of Slope of Hope

Expected Move for the August 5, 2022, Expiration Cycle: 327.5 to 365

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 327.5 to 365.

If we look at the call side of MA for the August 5, 2022, expiration, we can see that selling the 380 call strike offers an 87.94% probability of success. The 380 call strike sits just above the expected move, or 365. We can define our risk through buying the 385 call, thereby creating a five-strike-wide bear call spread at the 380/385 call strikes.

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 327.5. The 300 put, with an 87.82% probability of success, works. Staying with a five-strike-wide spread I can buy the 295 put to define our risk and create a bull put spread at the 300/295 strikes.

We can create a trade with a nice probability of success if MA stays within the 85-point range, or between the 385 call strike and the 300 put strike. Our probability of success on the trade is 87.94% on the upside and 87.82% on the downside.

Moreover, we have a 10.95% cushion to the upside and a staggering 13.54% margin of error to the downside…well outside every historic earnings reaction in MA since 2006.

Here is the trade:

Simultaneously:

Sell to open MA August 5, 2022, 385 calls
Buy to open MA August 5, 2022, 390 calls
Sell to open MA August 5, 2022, 300 puts
Buy to open MA August 5, 2022, 295 puts for roughly $0.75 or $75 per iron condor

Our margin requirement would be $425 per iron condor. Again, the goal of selling the MA iron condor is to have the underlying stock stay below the 385 call strike and above the 300 put strike immediately after MA earnings are announced.

Here are the parameters for this trade:

The probability of success – 87.94% (call side) and 87.82% (put side)
The maximum return on the trade is the credit of $0.75, or $75 per iron condor
Max return: 17.6%
Break-even level: 150.75 – 119.25

Summary
Mastercard offers a decent opportunity for a trade and one that I will be focusing on next week. That being said, there are various other opportunities that should come our way next week so be prepared for two to three alerts, potentially more if all goes well.

The next Cabot Options Institute – Earnings Trader issue will be published on July 29, 2022.

About the Analyst

Andy Crowder

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.