Weekly Earnings Commentary
Earnings season is officially behind us. However, that doesn’t mean that we won’t have an opportunity or two rear its head on a weekly basis.
This week FedEx (FDX) presents a potential opportunity. The options are highly liquid and the IV rank sits above 48. Moreover, we have the ability to create a 42.5-point range around the expected move of 27.5 points. We won’t know for certain if a trade will be placed until Thursday, but all looks promising at the moment.
As a reminder, there will be no more Friday webinars until around mid-April when earnings season ramps back up. Until then, expect to see a few potential trades on a week-to-week basis in the weekly issues, some of which I plan to act on.
- Adobe (ADBE)
- FedEx (FDX)
If you have any questions, please do not hesitate to email me at firstname.lastname@example.org.
Top Earnings Options Plays
Here are a few top earnings options plays for this week (313-3/17) 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 This Week
FDX is due to announce earnings Thursday after the closing bell. The stock is currently trading for 201.19.
IV Rank: 48.2
Expected Move for the March 24, 2023, Expiration Cycle: 187.5 to 215
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 187.5 to 215.
If we look at the call side of FDX for the March 24, 2023, expiration, we can see that selling the 222.5 call strike offers an 88.81% probability of success. The 222.5 call strike sits just above the expected move, or 215.
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 187.5. The 180 put, with an 84.57% probability of success, works.
We can create a trade with a nice probability of success if FDX stays within the 42.5-point range, or between the 222.5 call strike and the 180 put strike. Our probability of success on the trade is 88.81% on the upside and 84.57% on the downside.
Moreover, we have an 11.8% cushion to the upside and a 10.5% margin of error to the downside.
If we look at the earnings reactions since 3/20/2007, we can see that there have been only a few breaches of 10.5% to the upside or downside after an earnings announcement.
As a result, an iron condor looks plausible in FDX this week. However, if one wanted to make a trade, below are the potential strikes that make the most sense.
Here is the potential trade (as always, if I decide to place a trade in FDX, I will send a trade alert with updated data):
Sell to open FDX March 24, 2023, 222.5 calls
Buy to open FDX March 24, 2023, 227.5 calls
Sell to open FDX March 24, 2023, 180 puts
Buy to open FDX March 24, 2023, 175 puts for roughly $1.00 or $100 per iron condor.
Our margin requirement would be roughly $400 per iron condor. Again, the goal of selling the FDX iron condor is to have the underlying stock stay below the 222.5 call strike and above the 180 put strike immediately after FDX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.81% (call side) and 84.57% (put side)
- The maximum return on the trade is the credit of $1.00, or $100 per iron condor
- Max return: 25.0% (based on $400 margin per iron condor)
- Break-even level: 223.5 – 179.00.
As always, if you have any questions, please do not hesitate to email me at email@example.com.
The next Cabot Options Institute – Earnings Trader issue will be published on
March 20, 2023.