Weekly Earnings Commentary
We remained on the sidelines last week and by the looks of what is on the earnings calendar this week, we might be sitting on the sidelines again this week. No worries, our patient approach continues to serve us well. I say this because this earnings cycle has been one of the most volatile in years. More active earnings traders have struggled while those that have remained patient, waiting for real opportunities to arise, have been rewarded. And while my goal is to make 8 to 10 trades per earnings season, sometimes we just don’t get there and that’s OK. Successful trading has always been about quality, not quantity. Who cares how many trades one places, if success isn’t a direct byproduct?
I think the image below humorously displays the focus for this week. All eyes on the newly appointed tech behemoth.
In the “Trade Ideas” section below, I’ve gone over a potential high-probability trade in NVDA. With the stock trading for 726, we can create an iron condor with a 400-point range. Our margin of error for the iron condor would be over 22% on the upside and over 18% on the downside. But it doesn’t matter what is being offered, I’ll gladly be sitting on the sideline watching the fireworks. Nonetheless, the potential trade below will be interesting to watch simply for educational purposes.
Our total return for this earnings cycle stands at 28.8%, one of our best performing earnings cycle since we initiated Earnings Trader back in mid-July 2022, smack dab in the middle of the most recent bear market.
The portfolio now stands at an all-time high of 97.6% in total returns.
Remember, even though these are short-term trades, this is a long-term strategy – a strategy based on the law of large numbers and statistical probabilities.
ALWAYS remember that risk management is key. If one trade stresses you out your position size is way too large. Pare it back. Position size is the only true way to manage risk using this approach. Yes, in almost every case, we will be able to get out for far less than a max loss, but stop-losses are only secondary to position size when managing risk. So please don’t overlook the importance of choosing an appropriate level of position size. Every investor will have a different level of risk tolerance, but without understanding your own risk-reward per trade, you are surely destined to create unnecessary challenges. Make it easy on yourself.
We’ve made 43 trades in total with a win ratio of 79.1% (34 out of 43 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Etsy (ETSY)
Expected Move or Range: (68-85)
Nvidia (NVDA)
Expected Move or Range (647.5-805)
Newmont Corp. (NEM)
Expected Move or Range (31-35.5)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (2/20-2/24) if you are so inclined:
Courtesy of Slope of Hope
Trade Ideas for This 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)
Nvidia (NVDA)
Nvidia (NVDA) is due to announce earnings Wednesday (2/21) after the closing bell.
The stock is currently trading for 726.13.
- IV Rank: 88.7
Expected Move for the February 23, 2024, Expiration Cycle: 647.5 to 805
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 647.5 to 805.
Since NVDA is due to announce Wednesday after the close, I want to go with the March 1, 2024 expiration cycle, rather than the short-term February 23, 2024 expiration cycle.
If we look at the call side of NVDA for the March 1, 2024, expiration, we can see that selling the 890 call strike offers a 90.36% probability of success. The call strike sits just above the expected move, at 805.
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 647.5. The 590 put, with a 90.21% probability of success, works.
We can create a trade with a nice probability of success if NVDA stays within the 400-point range, or between the 890 call strike and the 490 put strike. Our probability of success on the trade is 90.36% on the upside and 90.21% on the downside.
Moreover, we have a 22.5% cushion to the upside and an 18.7% margin of error to the downside.
If we look at the earnings reactions since 5/18/1999, we can see that there have only been a few large moves of roughly 15% to the upside and 15% to the downside after an earnings announcement, so the fairly wide margins of error of 22.5% and 18.7% seem appealing … and more importantly, opportunistic.
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 NVDA, I will send a trade alert with updated data):
Simultaneously:
Sell to open NVDA March 1, 2024, 890 calls
Buy to open NVDA March 1, 2024, 900 calls
Sell to open NVDA March 1, 2024, 590 puts
Buy to open NVDA March 1, 2024 580 puts for roughly $1.47 or $147 per iron condor.
Our margin requirement would be roughly $853 per iron condor. Again, the goal of selling the NVDA iron condor is to have the underlying stock stay below the 890 call strike and above the 890 put strike immediately after NVDA earnings are announced.
Here are the parameters for this trade:
1. The probability of success – 90.36% (call side) and 90.21% (put side)
2. The maximum return on the trade is the credit of $1.47, or $147 per iron condor
3. Max return: 17.2% (based on $853 margin per iron condor)
4. Break-even level: 891.47 – 488.53.
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 February 26, 2024.
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