Weekly Earnings Commentary
It’s been just over a week since the big banks announced earnings and during that time we’ve been fortunate to make an 8.0% return in JPM, and more recently, 6.4% in IBM using the Earnings Trader strategy.
Earnings announcements really ramp up this week with a long list of well-known blue-chip stocks due to announce. As I stated on our call last Friday, I hope to make at least two to three trades this week. During each earnings cycle we aim to make somewhere between 8 to 12 trades and given the opportunities ahead I don’t see any reason why we wouldn’t fall within our typical range.
Starting next week, I’ve decided to add a top 10 list (if we have enough quality announcements to get there each week) of weekly trade ideas for those that want to take on a few more trades during earning season. My goal is to make your research that much easier by providing a table of 10 stocks and their current IV, IV rank, expected move, price of 80% iron condor, etc. Again, I hope this will become a weekly tool for those of you who wish to step outside the box from time to time and take on your own trades…something I encourage all of you to work up to once you are comfortable with the strategy and thoroughly understand the risk involved and how it should be managed (position size, etc.).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Verizon (VZ)
- Microsoft (MSFT)
- Alphabet (GOOGL)
- Texas Instruments (TXN)
- Visa (V)
- Boeing (BA)
- Coca-Cola (KO)
- McDonald’s (MCD)
- Mastercard (MA)
- Intel (INTC)
- Chevron (CVX)
- Exxon Mobil (XOM)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (7/24-7/28) 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 tradeable 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 Tuesday after the closing bell.
The stock is currently trading for 239.25.
- IV Rank: 7.3
Expected Move for the July 28, 2023, Expiration Cycle: 229 to 250
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 229 to 250.
If we look at the call side of V for the July 28, 2023, expiration, we can see that selling the 252.5 call strike offers an 89.85% probability of success. The 252.5 call strike sits just above the expected move, or 250.
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 229. The 227.5 put, with an 86.39% probability of success, works.
We can create a trade with a nice probability of success if V stays within the 25-point range, or between the 252.5 call strike and the 227.5 put strike. Our probability of success on the trade is 89.85% on the upside and 86.39% on the downside.
Moreover, we have a 5.5% cushion to the upside and a 4.9% margin of error to the downside.
If we look at the earnings reactions since 2/04/2009, we can see that there have been only a few breaches of 5% 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 V, I will send a trade alert with updated data on Tuesday):
Simultaneously:
Sell to open V July 28, 2023, 252.5 calls
Buy to open V July 28, 2023, 257.5 calls
Sell to open V July 28, 2023, 227.5 puts
Buy to open V July 28, 2023, 222.5 puts for roughly $0.65 or $65 per iron condor.
Our margin requirement would be roughly $435 per iron condor. Again, the goal of selling the V iron condor is to have the underlying stock stay below the 252.5 call strike and above the 227.5 put strike immediately after V earnings are announced.
Here are the parameters for this trade:
- The probability of success – 89.85% (call side) and 86.39% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Max return: 14.9% (based on $435 margin per iron condor)
- Break-even level: 253.15 – 226.85.
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 31, 2023.