Earnings season is inching closer, but we are still several weeks away (mid-October) from the big banks kicking the earnings season off.

That being said, the next two weeks should offer some potential trades as FedEx (FDX) and Costco (COST) are due to announce later this week and Micron (MU) and Nike (NKE) announce the latter part of the following week. All four offer potential trades.

If I decide to make a trade, as always, I will send out a trade alert with all the details.

Cabot Options Institute – Earnings Trader Issue: September 19, 2022

Earnings season is inching closer, but we are still several weeks away (mid-October) from the big banks kicking the earnings season off.

If I decide to make a trade, as always, I will send out a trade alert with all the details.

Also, I’ve gone through a potential trade in the last section of our weekly issue, and this week I focus on Costco. I really like the potential of a trade in Costco this week, so make sure to take a look at the stated potential trade and what I’m looking for in the way of a range for my iron condor and the associate premium.

The Week Ahead

There are no real opportunities, at least in my book, next week. However, here are two stocks with incredibly high implied volatility that have suffered mightily over the past several earnings cycles. I’ll discuss, mostly for educational purposes, a potential bearish trade in GME in the “Trade Ideas for Next Week” section below.

FedEx (FDX)

COI_ET_091922_FDX_earningsreactions — Image Courtesy of Slope of Hope

Costco (COST)

COI_ET_091922_COST_earningsreactions — Image Courtesy of Slope of Hope

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 (9/19 to 9/23) if you are so inclined:

COI_ET_091922_earningscalendar — Image Courtesy of Slope of Hope

Trade Ideas for Next Week

Costco (COST)
COST is due to announce earnings Thursday after the closing bell. The stock is currently trading for 504.14.

IV Rank: 54.1

Expected Move for the September 30, 2022, Expiration Cycle: 477.50 to 530

Knowing the expected range, let’s look at an iron condor outside of the expected range, or 477.5 to 530.

If we look at the call side of COST for the September 30, 2022, expiration, we can see that selling the 540 call strike offers an 86.27% probability of success. The 540 call strike sits just above the expected move, or 530. We can define our risk through buying the 545 call, thereby creating a five-strike-wide bear call spread at the 540/545 call strikes.

By choosing the 540 call strike we have a 7.1% cushion to the upside.

Now let’s take a look at the bull put portion of our COST iron condor.

If we look at the put side of COST for the September 30, 2022, expiration, we can see that selling the 465 put strike offers an 82.96% probability of success. The 465 put strike sits just below the expected move, or 477.5. We can define our risk through buying the 460 put, thereby creating a five-strike-wide bull put spread at the 465/460 put strikes.

By choosing the 465 put strike we have a 7.7% cushion to the downside.

Here is the trade:

Simultaneously:

Sell to open COST September 30, 2022, 540 calls
Buy to open COST September 30, 2022, 545 calls
Sell to open COST September 30, 2022, 465 puts
Buy to open COST September 30, 2022, 460 puts for roughly $1.10, or $110 per iron condor.

Our margin requirement would be $390 per iron condor. The goal of selling the COST iron condor is to have the underlying stock stay between the 540 call strike and 465 put strike immediately after COST earnings are announced.

Here are the parameters for this trade:

The probability of success: 86.27% (call side) – 82.96% (put side)
The maximum return on the trade is the credit of $1.10, or $110 per iron condor
Max return: 28.2%
Break-even level: 541.10 – 463.90

There is a good chance I will place a trade in Costco towards the early part of the day Thursday. Obviously, as we get closer to Costco’s earnings on Thursday after the closing bell the strikes and prices will most likely change from the ones above, but at least by going through the exercise of scouting out a potential trade we have a good idea what to expect for a potential range and premium. Costco hasn’t moved more than 5% immediately following an earnings announcement, so if we can manage to create an iron condor that has a similar cushion to the trade above (more than 7% on the upside and downside) I have no problem placing a trade in Costco.

The next Cabot Options Institute – Earnings Trader issue will be published on September 26, 2022.

About the Analyst

Andy Crowder

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.