Weekly Earnings Commentary
Nothing new here. I’m going to keep it fairly short this week. We are firmly in the doldrums of earnings season and will be for the next several weeks.
Of course, what might seem like a slow crawl to the next earnings season, it’s only a month away. JPMorgan (JPM) and Wells Fargo (WFC) are just a couple of the notable names that report earnings July 14.
Our only real opportunity this week comes later today, a potential trade in Oracle (ORCL). I’ll take a closer look below. Both Kroger (KR) and Adobe (ADBE) offer interesting opportunities, but ultimately lack enough liquidity and options premium to make a trade worth it.
Our overall return is 49.2% – nothing to write home about, but also no complaints as we thankfully sit in positive territory during what has been an incredibly challenging market for all participants over the past year.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Oracle (ORCL)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (6/12 to 6/16) 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
Oracle (ORCL)
Oracle (ORCL) is due to announce earnings Monday after the closing bell.
The stock is currently trading for 109.86.
- IV Rank: 53.3
- IV: 54.5%
Expected Move for the June 16, 2023, Expiration Cycle: 102 to 117
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 102 to 117.
If we look at the call side of ORCL for the June 16, 2023, expiration, we can see that selling the 122 call strike offers an 87.06% probability of success. The 122 call strike sits just above the expected move, or 117.
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 102. The 100 put, with an 85.11% probability of success, works.
We can create a trade with a nice probability of success if ORCL stays within the 22-point range, or between the 122 call strike and the 100 put strike. Our probability of success on the trade is 87.06% on the upside and 85.11% on the downside.
Moreover, we have an 11.1% cushion to the upside and a 9.0% margin of error to the downside.
If we look at the earnings reactions since 3/20/2007 we can see that there have been only a few breaches of 10% to the upside or downside after an earnings announcement.
Earnings Reaction at Open Bell
Earnings Reaction at Closing Bell
An iron condor looks enticing in ORCL this week. 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 a potential trade:
Simultaneously:
Sell to open ORCL June 16, 2023, 122 calls
Buy to open ORCL June 16, 2023, 127 calls
Sell to open ORCL June 16, 2023, 100 puts
Buy to open ORCL June 16, 2023, 95 puts for roughly $0.75 or $75 per iron condor.
Our margin requirement would be roughly $425 per iron condor. Again, the goal of selling the ORCL iron condor is to have the underlying stock stay below the 122 call strike and above the 100 put strike immediately after ORCL earnings are announced.
Here are the parameters for this trade:
- The probability of success – 87.07% (call side) and 85.11% (put side)
- The maximum return on the trade is the credit of $0.75, or $75 per iron condor
- Max return: 17.6% (based on $425 margin per iron condor)
- Break-even level: 122.75 – 99.25.
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 June 20, 2023.