Weekly Earnings Commentary
So far, so good this earnings season.
We’ve had three successful one-day trades … 8.0% in JPM, 6.4% in IBM and more recently 5.4% in V.
Earnings announcements continue this week with a long list of more well-known blue-chip stocks due to announce. As I stated on our call last Friday, I hope to make at least two 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.
As discussed on our subscriber call last Friday, the top two on my list are SBUX and COP, both of which are offering some decent premium, especially COP. Check out the trade idea below for my thoughts on COP.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Caterpillar (CAT)
- Pfizer (PFE)
- Merck (MRK)
- CVS Health (CVS)
- Starbucks (SBUX)
- PayPal (PYPL)
- Apple (AAPL)
- Amazon (AMZN)
- ConocoPhillips(COP)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (7/31 to 8/04) if you are so inclined:
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)
ConocoPhillips (COP)
ConocoPhillips (COP) is due to announce earnings Thursday before the opening bell.
The stock is currently trading for 239.25.
- IV Rank: 2.7
Expected Move for the August 11, 2023, Expiration Cycle: 111 to 121
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 111 to 121.
If we look at the call side of COP for the August 11, 2023, expiration, we can see that selling the 123 call strike offers an 87.21% probability of success. The 123 call strike sits just above the expected move, or 121.
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 111. The 109 put, with an 85.51% probability of success, works.
We can create a trade with a nice probability of success if COP stays within the 14-point range, or between the 123 call strike and the 109 put strike. Our probability of success on the trade is 87.21% on the upside and 85.51% on the downside.
Moreover, we have a 6.1% cushion to the upside and a 5.9% margin of error to the downside.
If we look at the earnings reactions since 10/25/2006, we can see that there have been only a few breaches of 4% to the upside or downside after an earnings announcement.
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 COP, I will send a trade alert with updated data on Wednesday):
Simultaneously:
Sell to open COP August 11, 2023, 123 calls
Buy to open COP August 11, 2023, 128 calls
Sell to open COP August 11, 2023, 109 puts
Buy to open COP August 11, 2023, 104 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 COP iron condor is to have the underlying stock stay below the 123 call strike and above the 109 put strike immediately after COP earnings are announced.
Here are the parameters for this trade:
- The probability of success – 87.21% (call side) and 85.51% (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: 123.65 – 108.35.
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 August 7, 2023.