We are two weeks into the earnings season doldrums and the opportunities are, at least for now, non-existent. But as I state almost every week, while the offseason earnings trades oftentimes lack all the necessities for an actual trade, it’s still worth looking at potential trades as we patiently wait for another earnings season, if only for educational purposes.

Cabot Options Institute – Earnings Trader Issue: September 2, 2022

Before I get to this week’s issue, I wanted to let everyone know that starting September 12 our weekly issues will be released on Mondays instead of Fridays. This should allow me to give all of you more thorough weekly reviews and prep heading into the following week. As always, if you have any questions, comments or feedback, please do not hesitate to email me at andy@cabotwealth.com.

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.

DocuSign (DOCU)

COI_ET_090222_DOCU_reactions — Images Courtesy of Slope of Hope

GameStop (GME)

COI_ET_090222_GME_reaction — Images 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 next week (9/5 to 9/9) if you are so inclined:

COI_ET_090222_volatilitycalendar — Image Courtesy of Slope of Hope

Trade Ideas for Next Week

GameStop (GME)
GME is due to announce earnings next Wednesday (September 7) after the closing bell. The stock is currently trading for 27.63.

IV Rank: 33.6

Expected Move for the September 9, 2022, Expiration Cycle: 23.5 to 31.5

Knowing the expected range, let’s look at a bear call spread above the expected range, or 31.5.

If we look at the call side of GME for the September 9, 2022, expiration, we can see that selling the 32.5 call strike offers an 81.27% probability of success. The 32.5 call strike sits just above the expected move, or 31.5. We can define our risk through buying the 37.5 call, thereby creating a five-strike-wide bear call spread at the 32.5/37.5 call strikes.

By choosing the 32.5 call strike we have an 18.2% cushion to the upside.

Here is the trade:

Simultaneously:

Sell to open GME September 9, 2022, 32.5 calls

Buy to open GME September 9, 2022, 37.5 calls for roughly $0.45, or $45 per iron condor.

Our margin requirement would be $455 per iron condor. The goal of selling the GME bear call spread is to have the underlying stock stay below the 32.5 call strike immediately after GME earnings are announced.

Here are the parameters for this trade:

The probability of success: 81.27% (call side)
The maximum return on the trade is the credit of $0.45, or $45 per iron condor
Max return: 9.9%
Break-even level: 32.95

Summary
Regardless of the 18.2% cushion or margin of error to the upside, you couldn’t pay me to place a trade in GME. But given the slow week, recent popularity of GME, poor post-earnings performance for nine straight earnings cycles and an incredibly high IV I wanted to humor everyone by taking a look at what GME was offering for this earnings cycle. If you decide to place a trade in GME, which I strongly disapprove of, please, please, please keep your position size incredibly small.

The next Cabot Options Institute – Earnings Trader issue will be published on September 12, 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.