COI Earnings Trader Issue: February 5, 2024

Weekly Earnings Commentary

Before I get started, I want to remind everyone about our weekly Friday subscriber-only call this week. If you wish to attend the call, please click here to sign up.

We made our third straight successful trade for this earnings cycle late last week. We were thankful to take quick profits in Microsoft (MSFT) Wednesday morning. All went as planned as MSFT opened well within the chosen range of our iron condor and, as a result, we were able to take off the trade for a nice one-day gain of 11.1%. Our total return for this earnings cycle stands at 23.2%.

As I discussed in our last subscriber-only webinar, next week is fairly slow for trading opportunities. That being said, as I pointed out last Friday on our call, Amgen (AMGN) is offering an interesting trading set-up. If everything holds steady I’ll be looking to send out an alert this afternoon, so be on the lookout.

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.

As we start to take on more trades, 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 42 trades in total with a win ratio of 78.5% (33 out of 42 winning trades).

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

Weekly Watchlist

Disney (DIS)
Expected Move or Range: (91-103)

Amgen (AMGN)
Expected Move or Range (297-348)

Alibaba (BABA)
Expected Move or Range (67-77)

PayPal (PYPL)
Expected Move or Range (58-67)

ConocoPhillips (COP)
Expected Move or Range (103-118)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (2/05-2/09) if you are so inclined:

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)

Amgen (AMGN)

Amgen (AMGN) is due to announce earnings Tuesday after the closing bell.

The stock is currently trading for 323.19.

IV Rank: 73.5

Expected Move for the February 9, 2024, Expiration Cycle: 298 to 348

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 298 to 348.

If we look at the call side of AMGN for the February 9, 2024, expiration, we can see that selling the 350 call strike offers a 94.28% probability of success. The call strike sits just above the expected move, at 348.

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 298. The 295 put, with a 94.55% probability of success, works.

We can create a trade with a nice probability of success if AMGN stays within the 55-point range, or between the 350 call strike and the 295 put strike. Our probability of success on the trade is 94.28% on the upside and 94.55% on the downside.

Moreover, we have an 8.3% cushion to the upside and an 8.7% margin of error to the downside.

If we look at the earnings reactions since 4/17/1996, 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 8.3% and 8.7% 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 AMGN, I will send a trade alert with updated data):

Simultaneously:

Sell to open AMGN February 9, 2024, 350 calls

Buy to open AMGN February 9, 2024, 355 calls

Sell to open AMGN February 9, 2024, 295 puts

Buy to open AMGN February 9, 2024 290 puts for roughly $0.50 or $50 per iron condor.

Our margin requirement would be roughly $460 per iron condor. Again, the goal of selling the AMGN iron condor is to have the underlying stock stay below the 350 call strike and above the 295 put strike immediately after AMGN earnings are announced.

Here are the parameters for this trade:

The probability of success – 94.28% (call side) and 94.55% (put side)
The maximum return on the trade is the credit of $0.50, or $50 per iron condor
Max return: 11.1% (based on $450 margin per iron condor)
Break-even level: 350.50 – 294.50.

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 12, 2024.

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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.