Cabot Options Institute – Earnings Trader Issue: October 10, 2022

Earnings season is finally upon us.

This week offers up a few potential trading opportunities, particularly in the big banks. JPMorgan (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.

Weekly Earnings Commentary

Earnings season is finally upon us.

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 October 14, 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.

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 (10/10 to 10/14) if you are so inclined:

COI_ET_100922_earningsreactions — Image Courtesy of Slope of Hope

Trade Ideas for Next Week

JP Morgan (JPM)
JPM is due to announce earnings Friday (10/14) prior to the opening bell. The stock is currently trading for 105.98.

IV Rank: 75.3

Expected Move for the October 21, 2022, Expiration Cycle: 99 to 113

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 99 to 113.

If we look at the call side of JPM for the October 21, 2022, expiration, we can see that selling the 116 call strike offers an 88.82% probability of success. The 116 call strike sits just above the expected move, or 113. We can define our risk through buying the 121 call, thereby creating a five-strike-wide bear call spread at the 116/121 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 99. The 95 put, with an 84.85% 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 95/90 strikes.

We can create a trade with a nice probability of success if JPM stays within the 21-point range, or between the 116 call strike and the 95 put strike. Our probability of success on the trade is 88.22% on the upside and 84.85% on the downside.

Here is the trade:

Simultaneously:
Sell to open JPM October 21, 2022, 116 calls
Buy to open JPM October 21, 2022, 121 calls
Sell to open JPM October 21, 2022, 95 puts
Buy to open JPM October 21, 2022, 90 for roughly $0.74 or $74 per iron condor

Our margin requirement would be $426 per iron condor. Again, the goal of selling the JPM iron condor is to have the underlying stock stay below the 116 call strike and above the 95 put strike immediately after JPM earnings are announced.

Here are the parameters for this trade:

The probability of success – 88.22% (call side) and 84.85% (put side)
The maximum return on the trade is the credit of $0.74, or $74 per iron condor
Max return: 17.4%
Break-even level: 116.74 – 94.26

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 $0.74 in premium for a potential 17.4% return. Because JPM reports late in the week (before the open Friday), I want to use the expiration cycle going out roughly two cycles, which is why I’ve chosen the October 21, 2022, as opposed to the October 14, 2022, expiration cycle.

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 October 17, 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.