Weekly Earnings Commentary
Earnings season is officially behind us. However, there will still be some opportunities as we enter the earnings doldrums.
Looking back on the previous earnings season, our conservative approach led to a 100% win ratio, though we only made 6 trades. Obviously, this is on the lower side for the number of trades that we typically make. But going back to June, when I started all of my options services here at Cabot, I’ve stated on numerous occasions that I intend on taking a more conservative approach while we continue to endure the ongoing signs of a bear market. Remember, it’s always quality over quantity. That being said, when we see a sense of normalcy return to the market, which could be soon (crossing fingers), that number of trades per earnings season will certainly pick back up.
Our cumulative total this past earnings season was 36.9% with an average return per trade of 6.2%. No complaints here, particularly when you consider that these are one-day trades that eliminate lots of the ongoing, day-to-day volatility that the market has experienced. Moreover, in comparison, the S&P 500 is only up 2.1% since we made our first trade in JPM back on January 12, 2023.
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.
Weekly Watchlist
- CrowdStrike (CRWD)
- DocuSign (DOCU)
- Oracle (ORCL)
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 (3/6 to 3/10) 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
Oracle (ORCL)
ORCL is due to announce earnings Thursday after the closing bell. The stock is currently trading for 89.25.
· IV Rank: 28.4
Expected Move for the March 17, 2023, Expiration Cycle: 84 to 94
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 84 to 94.
If we look at the call side of ORCL for the March 17, 2023, expiration, we can see that selling the 96 call strike offers an 86.30% probability of success. The 96 call strike sits just above the expected move, or 94.
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 84. The 82 put, with an 84.65% probability of success, works.
We can create a trade with a nice probability of success if ORCL stays within the 14-point range, or between the 96 call strike and the 82 put strike. Our probability of success on the trade is 86.30% on the upside and 84.65% on the downside.
Moreover, we have a 7.6% cushion to the upside and an 8.1% margin of error to the downside.
If we look at the earnings reactions since 3/20/2007, we can see that there have been several breaches of 7.5% to the upside or downside after an earnings announcement.
As a result, an iron condor doesn’t look likely in ORCL 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 ORCL, I will send a trade alert with updated data):
Simultaneously:
Sell to open ORCL March 17, 2023, 96 calls
Buy to open ORCL March 17, 2023, 100 calls
Sell to open ORCL March 17, 2023, 82 puts
Buy to open ORCL March 17, 2023, 78 puts for roughly $0.65 or $65 per iron condor.
Our margin requirement would be roughly $335 per iron condor. Again, the goal of selling the ORCL iron condor is to have the underlying stock stay below the 96 call strike and above the 82 put strike immediately after ORCL earnings are announced.
Here are the parameters for this trade:
- The probability of success – 86.30% (call side) and 84.65% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Max return: 19.4% (based on $335 margin per iron condor)
- Break-even level: 96.65 – 81.35.
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
March 13, 2023.