Weekly Earnings Commentary
Our good fortune continues!
Last week we locked in our fourth straight gain for returns of 25%. Our total win rate now stands at 75.7% (25/33 winning trades).
With 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.
This week is a slow one for earnings. We only have a few notable companies due to report. And when I say notable, I mean companies that offer high options liquidity. However, as I spoke about on our last subscriber-only call, the following week greets us with some big names including Home Depot (HD), Target (TGT), Cisco Systems (CSCO) and Walmart (WMT).
Until then, I’ll be focusing on the short list of companies on our Weekly Watchlist below.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- UPS (UPS)
- Disney (DIS)
- Wynn Resorts (WYNN)
- Alibaba (BABA)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (8/07 to 8/11) 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)
Wynn Resorts (WYNN)
Wynn Resorts (WYNN) is due to announce earnings Wednesday after the opening bell.
The stock is currently trading for 104.18.
- IV Rank: 14.9
Expected Move for the August 18, 2023, Expiration Cycle: 95 to 114
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 95 to 114.
If we look at the call side of WYNN for the August 18, 2023, expiration, we can see that selling the 115 call strike offers an 88.92% probability of success. The 115 call strike sits just above the expected move, or 114.
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 95. The 94 put, with an 84.91% probability of success, works.
We can create a trade with a nice probability of success if WYNN stays within the 21-point range, or between the 115 call strike and the 94 put strike. Our probability of success on the trade is 88.92% on the upside and 84.91% on the downside.
Moreover, we have a 10.5% cushion to the upside and a 9.6% margin of error to the downside.
If we look at the earnings reactions since 11/7/2006, we can see that there have been only a few breaches of 5% to the upside or downside after an earnings announcement with the last real anomaly occurring back in 2018.
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 WYNN, I will send a trade alert with updated data on Wednesday):
Simultaneously:
Sell to open WYNN August 18, 2023, 115 calls
Buy to open WYNN August 18, 2023, 120 calls
Sell to open WYNN August 18, 2023, 94 puts
Buy to open WYNN August 18, 2023, 90 puts for roughly $0.65 or $65 per iron condor.
Our margin requirement would be roughly $435 per iron condor. Again, the goal of selling the WYNN iron condor is to have the underlying stock stay below the 115 call strike and above the 94 put strike immediately after WYNN earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.92% (call side) and 84.91% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Max return: 14.9% (based on $435 margin per iron condor)
- Break-even level: 115.65 – 93.35.
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 14, 2023.