Cabot Options Institute – Earnings Trader Issue: October 24, 2022

Weekly Earnings Commentary

If you didn’t get a chance to attend last week’s subscriber-only event you can access the recording of the event here. It will be well worth your listen as we covered the ins and outs of our AXP trade and offered a detailed look at a few potential upcoming trades.

We locked in another profitable trade late last week, this time in American Express (AXP). I went over the trade in great detail in our subscriber-only event so if you have the time, take a listen as you will find the information discussed incredibly helpful going forward. Our one-day return in AXP was 5.3%, which brings us to a total of 12% for this earnings season.

As we move to the heart of earnings I expect the pace of trading to pick up a bit. We have numerous opportunities this week with Microsoft (MSFT), Visa (V) and Apple (AAPL), just to name a few. I expect to see at minimum two trades this week with a decent potential for four, potentially more.

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 (10/24 to 10/28) if you are so inclined:

Trade Ideas for Next Week

Visa (V)
Visa is due to announce earnings Tuesday (10/25) after the closing bell. The stock is currently trading for 190.37.

IV Rank: 67.2

Expected Move for the October 28, 2022, Expiration Cycle: 182 to 198

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 182 to 198.

If we look at the call side of V for the October 28, 2022, expiration, we can see that selling the 205 call strike offers an 89.42% probability of success. The 205 call strike sits just above the expected move, or 198. We can define our risk through buying the 210 call, thereby creating a five-strike-wide bear call spread at the 205/210 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 182. The 175 put, with an 87.94% probability of success, works. Staying with a five-strike-wide spread I can buy the 170 put to define our risk and create a bull put spread at the 175/170 strikes.

We can create a trade with a nice probability of success if V stays within the 30-point range, or between the 205 call strike and the 175 put strike. Our probability of success on the trade is 89.42% on the upside and 87.94% on the downside.

Here is the trade:

Simultaneously:Sell to open V October 28, 2022, 205 calls
Buy to open V October 28, 2022 210 calls
Sell to open V October 28, 2022, 175 puts
Buy to open V October 28, 2022, 170 puts for roughly $0.68 or $68 per iron condor

Our margin requirement would be $432 per iron condor. Again, the goal of selling the V iron condor is to have the underlying stock stay below the 205 call strike and above the 175 put strike immediately after V earnings are announced.

Here are the parameters for this trade:

The probability of success – 89.42% (call side) and 87.94% (put side)
The maximum return on the trade is the credit of $0.68, or $68 per iron condor
Max return: 15.7%
Break-even level: 205.68 – 174.32

Summary

V offers a decent opportunity for a trade and one that I will be focusing on as the week progresses. Microsoft (MSFT) is another stock I like to trade during earnings season if the metrics look good, so don’t be surprised to see at least two trades, if not more, this 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.

The next Cabot Options Institute – Earnings Trader issue will be published on October 31, 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.