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Earnings Trader
Collect the Biggest Option Payouts Every Quarter

Cabot Options Institute – Earnings Trader Issue: May 1, 2023

Weekly Earnings Commentary

Our next webinar is Friday, May 5. If you wish to attend the event or simply wish to receive a notification of the recording’s availability, please click here.

Our focus this week will be on CVS Health (CVS), Starbucks (SBUX), ConocoPhillips (COP) and Apple (AAPL).

Last Friday, during our live webinar, we took a detailed look at what type of trading opportunities the four companies above (and several others) were offering prior to their earnings releases this week. Fortunately, it looks like all four offer some decent trading opportunities, although Mr. Market will ultimately dictate whether or not the same opportunities are available at the time of the trade. My hope is that we are able to get two to three trades off this week, bringing our total for this earnings season to seven.

So far, this earnings season has been a tough one. In total we’ve placed four trades, with a 50% win ratio and a cumulative loss just over -20%. But the season is far from over and the recent performance is a good reminder just how important risk management is in the long-term success of the strategy. Since August 15, 2022, we witnessed a stretch of returns that reached 76.2% (13 out of 15 winning trades) before taking the recent step back. But those returns don’t mean much if overconfidence steps in and the decision to drastically increase your position size, based on prior returns, is the path forward.

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Weekly Watchlist

  • Pfizer (PFE)
  • Starbucks (SBUX)
  • CVS Health (CVS)
  • ConocoPhillips (COP)
  • Apple (AAPL)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (5/1-5/5) if you are so inclined:

COI_ET_043023_earningscalendar.png

Images Courtesy of Slope of Hope

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

Apple (AAPL)

Apple (AAPL) is due to announce earnings Thursday after the closing bell.

The stock is currently trading for 169.68.

  • IV Rank: 8.9
  • IV: 32.7%

Expected Move for the May 12, 2023, Expiration Cycle: 162 to 176

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 162 to 176.

If we look at the call side of AAPL for the May 12, 2023, expiration, we can see that selling the 180 call strike offers an 88.05% probability of success. The 180 call strike sits just above the expected move, or 176.

COI_ET_043023_AAPL_bearcall.png

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 162. The 157.5 put, with an 85.38% probability of success, works.

COI_ET_043023_AAPL_bullput.png

We can create a trade with a nice probability of success if AAPL stays within the 22.5-point range, or between the 180 call strike and the 157.5 put strike. Our probability of success on the trade is 88.05% on the upside and 85.38% on the downside.

Moreover, we have a 6.1% cushion to the upside and a 7.2% margin of error to the downside.

If we look at the earnings reactions, we can see that over the past five years or so there have been only a few breaches of 5% to the upside or downside after an earnings announcement.

Net Change – At the Opening Bell

COI_ET_043023_AAPL_earningreaction.png

Full Bar – Price Movement Throughout the Day

COI_ET_043023_AAPL_fullbar.png

If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade. At the time of the trade, my hope is that I can increase my “cushion,” or probabilities of success on the trade, as I would be far more comfortable. However, the premium must still make sense.

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

Simultaneously:

Sell to open AAPL May 12, 2023, 180 calls

Buy to open AAPL May 12, 2023, 185 calls

Sell to open AAPL May 12, 2023, 157.5 puts

Buy to open AAPL May 12, 2023, 152.5.5 puts for roughly $0.70 or $70 per iron condor.

Our margin requirement would be roughly $430 per iron condor. Again, the goal of selling the AAPL iron condor is to have the underlying stock stay below the 180 call strike and above the 157.5 put strike immediately after AAPL earnings are announced.

Here are the parameters for this trade:

  • The probability of success – 88.05% (call side) and 85.38% (put side)
  • The maximum return on the trade is the credit of $0.70, or $70 per iron condor
  • Max return: 16.3% (based on $430 margin per iron condor)
  • Break-even level: 180.70 – 156.80.

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 May 8, 2023.

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.