Weekly Earnings Commentary
Fortunately, the start of earnings season started off on the right foot. On Thursday, we placed our first trade of the season in JPMorgan Chase (JPM), our standard, outside-of-the-expected-move, iron condor. On Friday, JPM opened up slightly, well within our chosen range and as a result, all uncertainty around the announcement diminished, volatility was immediately crushed, and we were given the opportunity to take off the trade for a profit. Shortly after the opening bell we locked in a quick one-day gain of 8.0%.
This week should give us numerous trading opportunities. As I discussed on our subscriber call last Friday, I expect to make at least 2 trades, if not 3, possibly even 4. Four might be pushing it, but as we went over in a step-by-step manner on the subscriber call, there are some real opportunities in AXP, IBM, MS and several others. So be prepared to see several alerts hit your inbox this week.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Morgan Stanley (MS)
- Goldman Sachs (GS)
- International Business Machines (IBM)
- United Airlines (UAL)
- Las Vegas Sands (LVS)
- American Airlines (AAL)
- Johnson & Johnson (JNJ)
- Netflix (NFLX)
- Tesla (TSLA)
- American Express (AXP)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (7/17-7/21) if you are so inclined:
Images Courtesy of Slope of Hope
Trade Ideas for Next 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)
American Express (AXP)
American Express (AXP) is due to announce earnings Friday before the opening bell.
The stock is currently trading for 173.39.
- IV Rank: 7.3
Expected Move for the July 21, 2023, Expiration Cycle: 167.5 to 180
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 167.5 to 180.
If we look at the call side of AXP for the July 28, 2023, expiration, we can see that selling the call strike offers an 89.09% probability of success. The 185 call strike sits just above the expected move, or 180.
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 167.5. The 162.5 put, with an 85.83% probability of success, works.
We can create a trade with a nice probability of success if AXP stays within the 22.5-point range, or between the 185 call strike and the 162.5 put strike. Our probability of success on the trade is 89.09% on the upside and 85.83% on the downside.
Moreover, we have a 6.7% cushion to the upside and a 6.3% margin of error to the downside.
If we look at the earnings reactions since 10/23/2006, we can see that there have been only a few breaches of 6% to the upside or downside after an earnings announcement.
Net Change – At the Opening Bell
Full Bar – Price Movement Throughout the Day
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 AXP, I will send a trade alert with updated data on Thursday):
Simultaneously:
Sell to open AXP July 28, 2023, 185 calls
Buy to open AXP July 28, 2023, 190 calls
Sell to open AXP July 28, 2023, 162.5 puts
Buy to open AXP July 28, 2023, 157.5 puts for roughly $0.68 or $68 per iron condor.
Our margin requirement would be roughly $432 per iron condor. Again, the goal of selling the AXP iron condor is to have the underlying stock stay below the 185 call strike and above the 162.5 put strike immediately after AXP earnings are announced.
Here are the parameters for this trade:
- The probability of success – 89.09% (call side) and 85.83% (put side)
- The maximum return on the trade is the credit of $0.68, or $68 per iron condor
- Max return: 15.7% (based on $432 margin per iron condor)
- Break-even level: 185.68 – 161.82.
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 July 24, 2023.