Cabot Options Institute – Earnings Trader Issue: November 7, 2022

Weekly Earnings Commentary

The upcoming week of earnings is a fairly slow one, with only a few real choices on the docket. Disney (DIS) is definitely the highlight of the week and the one I will be focusing on.

However, the following week we see lots of the big boys due to report, including Walmart (WMT), Home Depot (HD), Lowe’s (LOW), Target (TGT), Cisco Systems (CSCO) and several others. As I stated in the last webinar, I expect to see at least three, if not more, trades that week as earnings season slows down significantly afterwards.

As for this past week, we were able to get out for a small 2.7% loss in SBUX. So far this earnings season, we are averaging a one-day return of roughly 4% per trade, or what has been 4% per week for this earnings cycle. Certainly nothing to write home about, but respectable nonetheless given the overall performance of the market. I anticipate that we will make at least four more trades, if not more, before the earnings cycle slows down in two weeks.

As a reminder, we will have a subscriber-exclusive webinar every Friday during earnings season, so make sure to sign up. Register here.

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.

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 this week (11/7 to 11/11) 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.

Disney (DIS)
Disney is due to announce earnings Tuesday after the closing bell. The stock is currently trading for 99.58.

IV Rank: 53.9

Expected Move for the November 11, 2022, Expiration Cycle: 92 to 107

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 92 to 107.

If we look at the call side of DIS for the November 11, 2022, expiration, we can see that selling the 111 call strike offers an 88.00% probability of success. The 111 call strike sits just above the expected move, or 107. We can define our risk through buying the 116 call, thereby creating a five-strike-wide bear call spread at the 111/116 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 92. The 89 put, with an 86.77% probability of success, works. Staying with a five-strike-wide spread I can buy the 89 put to define our risk and create a bull put spread at the 89/84 strikes.

We can create a trade with a nice probability of success if DIS stays within the 22-point range, or between the 111 call strike and the 89 put strike. Our probability of success on the trade is 88.00% on the upside and 86.77% on the downside.

Moreover, we have an 11.5% cushion to the upside and 10.6% margin of error to the downside … well outside every historic earnings reaction in DIS since 2006 (see below).

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

Simultaneously:

Sell to open DIS November 11, 2022, 111 calls
Buy to open DIS November 11, 2022, 116 calls
Sell to open DIS November 11, 2022, 89 puts
Buy to open DIS November 11, 2022, 84 puts for roughly $0.72 or $72 per iron condor.

Our margin requirement would be $428 per iron condor. Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 116 call strike and above the 89 put strike immediately after DIS earnings are announced.

Here are the parameters for this trade:

The probability of success – 88.00% (call side) and 89.67% (put side)
The maximum return on the trade is the credit of $0.72, or $72 per iron condor
Max return: 16.8%
Break-even level: 116.72 – 88.28.

The next Cabot Options Institute – Earnings Trader issue will be published on November 14, 2022.

Andy Crowder

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. 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.