COI Earnings Trader Issue: January 22, 2024

Weekly Earnings Commentary

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

As we discussed on our subscriber-only call last week, this begins a four- to five-week period of major earnings announcements. More importantly, this week offers us several potential opportunities to trade a few earnings announcements.

Per our discussion last Friday, Visa (V), IBM (IBM) and American Express (AXP) offer the best opportunities with United Rentals (URI) not far behind. Surprisingly, Microsoft (MSFT) and Texas Instruments (TXN) didn’t offer any decent opportunities, or at least that was the case when we took a look Friday. But who knows, maybe implied volatility will kick up a bit higher before earnings and offer some better opportunities to sell premium.

As we start to take on more trades ALWAYS remember, 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 40 trades in total with a win ratio of 77.5% (31 out of 40 winning trades).

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

Weekly Watchlist

International Business Machines (IBM)
Expected Move or Range (156 - 187)

Johnson & Johnson (JNJ)
Expected Move or Range (157 - 166)

Visa (V)
Expected Move or Range (262 - 280)

Netflix (NFLX)
Expected Move or Range (440 - 525)

Microsoft (MSFT)
Expected Move or Range (380 – 418)

American Express (AXP)
Expected Move or Range (173 - 194)

Tesla (TSLA)
Expected Move or Range (195 - 230)

United Rentals (URI)
Expected Move or Range (530 - 615)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (1/22-1/26) 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)

Visa (V)

Visa (V) is due to announce earnings Wednesday after the closing bell.

The stock is currently trading for 270.90.

IV Rank: 39.9

Expected Move for the February 2, 2024, Expiration Cycle: 262 to 280

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 262 to 280.

If we look at the call side of V for the February 2, 2024, expiration, we can see that selling the 285 call strike offers an 87.54% probability of success. The call strike sits just above the expected move, or 280.

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 262. The 255 put, with an 87.36% probability of success, works.

We can create a trade with a nice probability of success if V stays within the 30-point range, or between the 285 call strike and the 255 put strike. Our probability of success on the trade is 87.54% on the upside and 87.36% on the downside.

Moreover, we have a 5.2% cushion to the upside and a 5.9% margin of error to the downside.

If we look at the earnings reactions since 4/28/2008, we can see that there have only been a few large moves of roughly 5% to the upside and 4% to the downside after an earnings announcement, so the fairly wide margins of error of 5.2% and 5.9% 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 V, I will send a trade alert with updated data):

Simultaneously:

Sell to open V February 2, 2024, 285 calls

Buy to open V February 2, 2024, 290 calls

Sell to open V February 2, 2024, 255 puts

Buy to open V February 2, 2024, 250 puts for roughly $0.70 or $70 per iron condor.

Our margin requirement would be roughly $430 per iron condor. Again, the goal of selling the V iron condor is to have the underlying stock stay below the 285 call strike and above the 255 put strike immediately after V earnings are announced.

Here are the parameters for this trade:

The probability of success – 87.54% (call side) and 87.36% (put side)
The maximum return on the trade is the credit of $0.70, or $70 per iron condor
Max return: 16.3% (based on $430 margin per iron condor)
Break-even level: 285.70 – 254.30.

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 January 29, 2024.

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.