Earnings season is finally upon us.
Next week offers up a few potential trading opportunities, particularly in the big banks. JP Morgan (JPM), Morgan Stanley (MS), Citigroup (C), Wells Fargo (WFC) and US Bank (USB) are the big announcements on the docket and the companies I will be focusing on.
Cabot Options Institute – Earnings Trader Issue: July 8, 2022
Earnings season is finally upon us.
Next week offers up a few potential trading opportunities, particularly in the big banks. JP Morgan (JPM), Morgan Stanley (MS), Citigroup (C), Wells Fargo (WFC) and US Bank (USB) are the big announcements on the docket and the companies I will be focusing on.
I also want to remind everyone that we will have a subscriber-exclusive webinar every Friday during earnings season, so make sure to sign-up when you get an opportunity. Here is a link to the next webinar on July 15, 2022: Register Here.
Please take the time to watch through the webinars and read through the strategy reports at your leisure so you can get a good idea as to what we are trying to accomplish with each and every earnings trade we place. More importantly, understand the importance of risk-management as seen through position-size. You will hear me discuss these topics during every weekly webinar. The law of large numbers is in our favor, but in order to be successful over the long term you must look at yourself as a risk manager first, trader second. You’ll truly start to understand this concept once we start making a few earnings season trades.
And of course, as always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
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 other top earnings options plays for next week (7/5 to 7/8) if you are so inclined:
Trade Ideas for Next Week
JP Morgan (JPM)
JPM is due to announce earnings Thursday (7/14) prior to the opening bell. The stock is currently trading for 111.34.
IV Rank: 89.29
Expected Move for the July 22, 2022, Expiration Cycle: 105 to 118
Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 105 to 118.
If we look at the call side of JPM for the July 22, 2022, expiration, we can see that selling the 121 call strike offers an 88.33% probability of success. The 121 call strike sits just above the expected move, or 118. We can define our risk through buying the 126 call, thereby creating a five-strike-wide bear call spread at the 121/126 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 105. The 100 put, with an 85.38% probability of success, works. Staying with a five-strike-wide spread, I can buy the 95 put to define our risk and create a bull put spread at the 100/95 strikes.
We can create a trade with a nice probability of success if JPM stays within the 21-point range, or between the 121 call strike and the 100 put strike. Our probability of success on the trade is 88.33% on the upside and 85.38% on the downside.
Here is the trade:
Simultaneously:
Sell to open JPM July 22, 2022, 121 calls
Buy to open JPM July 22, 2022, 126 calls
Sell to open JPM July 22, 2022, 100 puts
Buy to open JPM July 22, 2022, 95 for roughly $0.69 or $69 per iron condor
Our margin requirement would be $431 per iron condor. Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 121 call strike and above the 100 put strike immediately after JPM earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.33% (call side) and 85.38% (put side)
- The maximum return on the trade is the credit of $0.69, or $69 per iron condor
- Max return: 16.0%
- Break-even level: 121.69 – 99.31
Summary
JPM offers a decent opportunity for a trade. I like the 21-point range that we can create while still having the ability to bring in $0.69 in premium for a potential 16.0% return. Because JPM reports late in the week (before the open Thursday), I want to use the expiration cycle going out roughly two weeks, which is why I’ve chosen the July 22, 2022, as opposed to the July 15, 2022, expiration cycle.
If I decide to place a trade in JPM, it will probably be early next week. It will be interesting to see how the premium and expected move change prior to a potential trade. My hope is that we stay around these levels as we head into Monday’s trading session.
As always, if I decide to place a trade, I will let everyone know well ahead of time.
Citigroup (C)
C is due to announce earnings Friday (7/15) prior to the opening bell. The stock is currently trading for 46.05.
IV Rank: 94.82
Expected Move for the July 22, 2022, Expiration Cycle: 43 to 49
Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 43 to 49.
If we look at the call side of C for the July 22, 2022, expiration, we can see that selling the 50 call strike offers an 86.10% probability of success. The 50 call strike sits just above the expected move, or 49. We can define our risk through buying the 54 call, thereby creating a four-strike-wide bear call spread at the 50/54 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 43. The 41 put, with an 83.39% probability of success, works. Staying with a four-strike-wide spread I can buy the 37 put to define our risk and create a bull put spread at the 41/37 strikes.
We can create a trade with a nice probability of success if C stays within the nine-point range, or between the 50 call strike and the 41 put strike. Our probability of success on the trade is 86.10% on the upside and 83.39% on the downside.
Here is the trade:
Simultaneously:
Sell to open C July 22, 2022, 50 calls
Buy to open C July 22, 2022, 54 calls
Sell to open C July 22, 2022, 41 puts
Buy to open C July 22, 2022, 37 puts for roughly $0.50 or $50 per iron condor
Our margin requirement would be $350 per iron condor. Again, the goal of selling the C iron condor is to have the underlying stock stay below the 50 call strike and above the 41 put strike immediately after C earnings are announced.
Here are the parameters for this trade:
- The probability of success – 86.10% (call side) and 83.39% (put side)
- The maximum return on the trade is the credit of $0.50, or $50 per iron condor
- Max return: 14.3%
- Break-even level: 50.50 – 40.50
Summary
Citigroup offers a decent opportunity for a trade, although I prefer JPM’s current stats, etc.
I’ll be watching how the expected range shifts and shrinks as we get closer to Citigroup’s earnings announcements. If we can still place a trade with a similar range and premium as we move into early next week, I might decide to take a serious look at a trade in Citigroup.
There are also a few other big bank stocks I’ll be watching including Wells Fargo (WFC), US Bank (USB) and a few others.
Again, if I decide to place a trade in C it will probably be early next week. My hope is that we stay around these levels as we head into Monday’s, if not Tuesday’s, trading session.
As always, if I decide to place a trade, I will let everyone know well ahead of time.
The next Cabot Options Institute – Earnings Trader issue will be published on July 15, 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.