Weekly Earnings Commentary
We are on the downside of earnings season, but there are still a few opportunities ahead. Early this week, Lowe’s (LOW) is due to announce earnings. Per usual, I’ve gone over an example in the “Trade Ideas” section below and this week I’ve highlighted Lowe’s. The stock is coming into earnings with a decent IV rank (49.8) and an opportunity to create a fairly wide range around the expected move for the stock (224-241) while maintaining a nice premium. Moreover, the premium is decent enough to where we have the ability to widen the range even more while again bringing in a decent premium.
Our total return for this earnings cycle stands at 28.8%, one of our best performing earnings cycles 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
Lowe’s (LOW)
Expected Move or Range: (224-241)
Devon Energy (DVN)
Expected Move or Range (41-46)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (2/26-3/01) if you are so inclined:
Images 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)
Lowe’s (LOW)
Lowe’s (LOW) is due to announce earnings Tuesday (2/27) before the opening bell.
The stock is currently trading for 232.52.
- IV Rank: 49.8
Expected Move for the March 1, 2024, Expiration Cycle: 224 to 241
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 224 to 241.
Since LOW is due to announce Tuesday before the open, I want to go with the March 1, 2024 expiration cycle.
If we look at the call side of LOW for the March 1, 2024, expiration, we can see that selling the 245 call strike offers an 85.23% probability of success. The call strike sits just above the expected move, at 241.
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 224. The 220 put, with an 85.39% probability of success, works.
We can create a trade with a nice probability of success if LOW stays within the 25-point range, or between the 245 call strike and the 220 put strike. Our probability of success on the trade is 85.23% on the upside and 85.39% on the downside.
Moreover, we have a 5.3% cushion to the upside and an 5.4% margin of error to the downside.
If we look at the earnings reactions since 11/13/1995, we can see that there have only been a few large moves of roughly 5% to the upside and 5% to the downside after an earnings announcement, so the fairly wide margins of error of 5.3% and 5.4% 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 LOW, I will send a trade alert with updated data):
Simultaneously:
Sell to open LOW March 1, 2024, 245 calls
Buy to open LOW March 1, 2024, 250 calls
Sell to open LOW March 1, 2024, 220 puts
Buy to open LOW March 1, 2024 215 puts for roughly $0.96 or $0.96 per iron condor.
Our margin requirement would be roughly $404 per iron condor. Again, the goal of selling the LOW iron condor is to have the underlying stock stay below the 245 call strike and above the 220 put strike immediately after Lowe’s earnings are announced.
Here are the parameters for this trade:
1. The probability of success – 85.23% (call side) and 85.39% (put side)
2. The maximum return on the trade is the credit of $0.96, or $96 per iron condor
3. Max return: 23.8% (based on $404 margin per iron condor)
4. Break-even level: 245.96 – 219.04.
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 March 4, 2024.
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