Weekly Earnings Commentary
As earnings season winds down, we are greeted with several nice trading opportunities in some big names including Home Depot (HD), Target (TGT), Cisco Systems (CSCO) and Walmart (WMT).
After a slow earnings week last week things pick back up on the earning front this week. My hope is that we are able to make two, if not three trades this week with the focus being on the four trades in the Weekly Watchlist below. As we discussed on our subscriber call last week (out last call for this earnings cycle), we have several quality opportunities in front of us. Now let’s hope Mr. Market offers us some decent probabilities and premium so that we can take on a few short-term earnings trades.
As I stated last week, after a win rate of just 60% (9/15 winning trades) in 2022 and total returns reaching a paltry 8.1%, our win rate in 2023 stands at 88.9% (16/18 winning trades) with total returns now reaching 75%. What a difference a year makes! Hopefully, our good fortune continues, and it should if we continue to stick with the mechanics and, more importantly, a disciplined set of risk management guidelines, starting with appropriate and consistent position size.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Home Depot (HD)
- Target (TGT)
- Cisco Systems (CSCO)
- Walmart (WMT)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (8/14 to 8/18) if you are so inclined:
Images Courtesy of Slope of Hope
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.
Potential Trade Ideas for This Week (Not Official Trade Alerts)
Home Depot (HD)
Home Depot (HD) is due to announce earnings Tuesday before the opening bell.
The stock is currently trading for 331.11.
- IV Rank: 30.7
Expected Move for the August 25, 2023, Expiration Cycle: 317.5 to 345
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 317.5 to 345.
If we look at the call side of HD for the August 25, 2023, expiration, we can see that selling the 352.5 call strike offers an 86.90% probability of success. The 352.5 call strike sits just above the expected move, or 345.
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 317.5. The 310 put, with an 84.98% probability of success, works.
We can create a trade with a nice probability of success if HD stays within the 42.5-point range, or between the 352.5 call strike and the 310 put strike. Our probability of success on the trade is 86.90% on the upside and 84.98% on the downside.
Moreover, we have a 6.1% cushion to the upside and a 6.4% margin of error to the downside.
If we look at the earnings reactions since 11/13/2006, we can see that there have been only a few breaches of 4% to the upside or downside after an earnings announcement.
Net Change – At the Opening Bell
Full Bar – Closing Bell
If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade.
Here is the potential trade (as always, if I decide to place a trade in HD, I will send a trade alert with updated data on Monday):
Simultaneously:
Sell to open HD August 25, 2023, 352.5 calls
Buy to open HD August 25, 2023, 357.5 calls
Sell to open HD August 25, 2023, 310 puts
Buy to open HD August 25, 2023, 305 puts for roughly $1.00 or $100 per iron condor.
Our margin requirement would be roughly $400 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 352.5 call strike and above the 310 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
- The probability of success – 86.90% (call side) and 84.98% (put side)
- The maximum return on the trade is the credit of $1.00, or $100 per iron condor
- Max return: 25.0% (based on $400 margin per iron condor)
- Break-even level: 353.5 – 309.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
The next Cabot Options Institute – Earnings Trader issue will be published on August 21, 2023.