COI Earnings Trader Issue: December 11, 2023

Weekly Earnings Commentary

We have officially entered the earnings doldrums, but that certainly doesn’t mean that opportunities won’t present themselves. For instance, this week Costco (COST) and Oracle (ORCL) announce earnings and offer a decent opportunity for an iron condor. I’ve gone over a detailed iron condor example in the “Weekly Trade Ideas” section below.

We’ve made 39 trades in total with a win ratio of 76.9% (30 out of 39 winning trades).

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Weekly Watchlist

Costco (COST)
Expected Move or Range: (590 – 630)

Oracle (ORCL)
Expected Move or Range (107 - 120)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (12/11 to 12/15) if you are so inclined:

Images Courtesy of Slope of Hope

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)

Costco (COST)

Costco (COST) is due to announce earnings Thursday after the closing bell.

The stock is currently trading for 610.78.

IV Rank: 32.4

Expected Move for the December 15, 2023, Expiration Cycle: 590 to 630

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 590 to 630.

If we look at the call side of COST for the December 22, 2023, expiration, we can see that selling the 640 call strike offers an 85.42% probability of success. The short call strike sits just above the expected move, or at 630.

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, 590. The 580 put, with an 86.45% probability of success, works.

We can create a trade with a nice probability of success if COST stays within the 60-point range, or between the 640 call strike and the 580 put strike. Our probability of success on the trade is 85.42% on the upside and 86.45% on the downside.

Moreover, we have a 4.7% cushion to the upside and a 5.1% margin of error to the downside.

If we look at the earnings reactions since 12/13/2006, we can see that there have only been a few moves of over 3% to the upside and downside after an earnings announcement, so the wide margins of error of 4.7% to the upside and 5.2% to the downside of the trade seem appealing.

Quick Stats

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 COST, I will send a trade alert with updated data):

Simultaneously:

Sell to open COST December 22, 2023, 640 calls

Buy to open COST December 22, 2023, 645 calls

Sell to open COST December 22, 2023 580 puts

Buy to open COST December 22, 2023 575 puts for roughly $1.00 or $1.00 per iron condor.

Our margin requirement would be roughly $400 per iron condor. Again, the goal of selling the COST iron condor is to have the underlying stock stay below the 640 call strike and above the 580 put strike immediately after COST earnings are announced.

Here are the parameters for this trade:

The probability of success – 85.42% (call side) and 86.45% (put side)
The maximum return on the trade is the credit of $1.00, or $1.00 per iron condor
Max return: 25.0% (based on $400 margin per iron condor)
Break-even level: 579 – 641

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 December 18, 2023.

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.