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 Lululemon (LULU) announces earnings and offers 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
Lululemon (LULU)
Expected Move or Range: (435 – 497.5)
DocuSign (DOCU)
Expected Move or Range (40 - 52)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (12/4 to 12/8) 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)
Lululemon (LULU)
Lululemon (LULU) is due to announce earnings Thursday after the closing bell.
The stock is currently trading for 466.61.
- IV Rank: 46.5
Expected Move for the December 15, 2023, Expiration Cycle: 435 to 497.5
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 435 to 497.5.
If we look at the call side of LULU for the December 15, 2023, expiration, we can see that selling the 505 call strike offers an 81.87% probability of success. The call strike sits just above the expected move, or 497.5.
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, 435. The 415 put, with an 87.76% probability of success, works.
We can create a trade with a nice probability of success if LULU stays within the 70-point range, or between the 505 call strike and the 435 put strike. Our probability of success on the trade is 81.87% on the upside and 87.76% on the downside.
Moreover, we have an 8.2% cushion to the upside and an 11.1% margin of error to the downside.
If we look at the earnings reactions since 3/26/2009, we can see that there have been several large moves of over 10% to the upside and only one large move of 8% to the downside after an earnings announcement, so the wide margins of error of 8.2% to the upside and 11.1% to the downside of the trade seem less appealing. If I could somehow extend my range to the upside, I might take a stab at the trade since the options liquidity is quite high for LULU.
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 LULU, I will send a trade alert with updated data):
Simultaneously:
Sell to open LULU December 15, 2023, 505 calls
Buy to open LULU December 15, 2023, 510 calls
Sell to open LULU December 15, 2023, 415 puts
Buy to open LULU December 15, 2023, 410 puts for roughly $1.25 or $125 per iron condor.
Our margin requirement would be roughly $375 per iron condor. Again, the goal of selling the LULU iron condor is to have the underlying stock stay below the 505 call strike and above the 415 put strike immediately after LULU earnings are announced.
Here are the parameters for this trade:
- The probability of success – 81.87% (call side) and 87.76% (put side)
- The maximum return on the trade is the credit of $1.25, or $125 per iron condor
- Max return: 33.3% (based on $375 margin per iron condor)
- Break-even level: 506.25 – 413.75
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 11, 2023.